Opinion Of Eminent Legal Luminaries On Controversial Issues

Capital gains – Transaction not regarded as transfer – Conversion of firm in to LLP– Conversion of Pvt. Ltd. to LLP

QUERY: P. Pvt. Ltd. wants to convert its status to status of Limited Liability Partnership (LLP), for which it has submitted that its total turnover is less than Rs. 60,00,000/- and total value of the assets does not exceed Rs. 5,00,00,000/- as appearing in the audited books of account of last three previous years.
How to covert status of Pvt. Co. into LLP without any tax implication as the word “value” appearing in sub clause (ea) of clause (xiiib) of section 47 means “Fair Market Value” or “book value”?
ANSWER: Chapter IV E – of the Income-tax Act, 1961 provide for “ Capital Gains”, which inter alia states for Transactions not regarded as transfer”.
Section 47 reads as under:
“Nothing contained in Section 45 shall apply to the following transfers:-
(xiiib) any transfer of a capital asset or intangible asset by a private company or unlisted public company (hereinafter in this clause referred to as the company) to a limited liability partnership or any transfer of a share or shares held in the company by a shareholder 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 Liabilities Partnership Act, 2008 (6 of 2009)”
Provided that—
(a) all the assets and liabilities of the company immediately before the conversion become the assets and liabilities of the limited liability partnership;
(b) all the shareholders of the company immediately before the conversion become the partners of the limited liability partnership and their capital contribution and profit sharing ratio in the limited liability partnership 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 limited liability partnership;
(d) the aggregate of the profit sharing ratio of the shareholders of the company in the limited liability partnership shall not be less than fifty per cent at any time during the period of five years from the date of conversion;
(e) the total sales, turnover or gross receipts in the 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;
[(ea) 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]
(f) 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.
Explanation.—For the purposes of this clause, the expressions “private company” and “unlisted public company” shall have the meanings respectively assigned to them in the
Limited Liability Partnership Act, 2008 (6 of 2009);
These provisions have been explained by the CBDT vide Circular No. 1 of 2011 dated April 6, 2011.
From the facts, and legal provisions as well as circular, it is clear that if the company complies with all the conditions of clause (xiiib) of section 47 then the querist can convert its status to LLP without any tax implication.
Further, sub-clause (ea) of clause (xiiib) of Section 47 provides for “total value of the assets as appearing in the books of account of the company” means book value. As per J. A. Parks on “Principles and Practice of Valuation” the “Book Value” is known as the value of a property as entered in the books of a company or organisation representing its original or historical cost of acquisition as diminished by cumulative depreciation till the year where accounting is made. The market value of the property may remain constant over the period or may also increase depending on market situation, but the book value will gradually go downwards commensurate with rate of depreciation.
Furthermore, as per the said author, the basic concept in respect of “fair market value’ is that on the price which property would ordinarily fetch on sale in the open market on the date of transfer. Market value is a very generalised concept. What any particulars purchaser pay for land whether at public auction or private treaty is not itself market value.
Again, section 2(22B) of the Income-tax Act 1961 defines “fair market value” in relation to a capital asset, means –
(i) The price that the capital asset would ordinarily fetch on sale in the open market on the relevant date; and
(ii) Where, the price referred to in sub-section (i) is not ascertainable, such price as may be determined in accordance with the rules made under this Act.
Thus, there is clear difference between “total value of the assets appearing in the books of account” i.e., book value and “ fair market value” So wherever the legislature wanted to use “fair value” or “fair market value” it has specifically stated like section 50D, which reads as under:
“Where the consideration received or accruing as a result of the transfer of a capital asset by an assessee is not ascertainable or cannot be determined, then, for the purpose of computing income chargeable to tax as capital gains, the fair market value of the said asset on the date of transfer shall be deemed to be the full value of the consideration received or accruing as a result of such transfer.”
Thus according to the author, the wordings “total value of the assets appearing in the books of account” means “book value” as appearing in the books of account and not the fair market value or fair value.


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One comment on “Capital gains – Transaction not regarded as transfer – Conversion of firm in to LLP– Conversion of Pvt. Ltd. to LLP
  1. Prakash says:

    Very good Article Sir. I would like to know what is the meaning “total value of the assets”? Is it referring to only Properties (Fixed Assets) or Net worth of the Company or Balance Sheet Total on Assets Side. Please clarify. Thanks in Advance.

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