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A recent tax ruling is changing the way companies in India operated for years. Converting a company to Limited Liability Partnership was a means to scale up, attract foreign investors as well as to distribute profits to partners without the fear of dividend distribution tax.
This new ruling however puts things in perspective and makes the task difficult for companies. In the middle of November, a Mumbai bench of the Income Tax Appellate Tribunal stated that conversion of a company into LLP will come under the gamut of transfer and will certainly be liable to capital gains tax. The ruling is directly against a Mumbai high court ruling which stated that this kind of conversion doesn’t come under a ‘transfer’ and thus will be exempt from any such tax.
The ruling is slated to have a far reaching impact on all future proceedings as well as pending cases and can force companies to reassess their actions. The execution of this ruling will lead to much higher liabilities as the transfer will take place when assets are transferred at an amount much more than the book value. What makes the ruling a little more complex is that according to the tribunal ruling, any tax liability that the company didn’t fulfil will be given to the LLP, thus making it difficult for LLPs.
The ruling was focused on Celerity Power, a private limited company which converted in to a LLP in September 2010 however the tax office had its doubts and didn’t agree to the company’s argument that the conversion of M/s Celerity Power Pvt Ltd into M/s Celerity Power LLP did not involve any transfer of property, assets or liabilities. Companies which have earnings less than Rs. 60 lakh are exempted from this transfer and in case the transfer from a company to an LLP is conducted at not higher than the book value – these companies will be exempt from any kind of additional tax. To understand more about the consequences of the ruling, you can get in touch with our tax experts and we’ll get back to you within 24 hours. Write to us at info@ascgroup.in
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