LLP and Income Tax

The Finance (No.2) Act, 2009 amended the Indian Income Tax Act 1961 for imposing tax on the Limited Liability Partnership (LLP).

The said Finance Act amended the Income Tax Act as under:

1. Substituted clause (23) of section 2 of the Income Tax Act so as to define the words “firm”, “partner” and “partnership” in the context of an
   entity registered under the Limited Liability Partnership Act, 2008 and also to retain the definitions of “firm”, “partner” and “partnership” in the context of a partnership formed under the Indian Partnership Act, 1932. Thus, LLP will be treated as traditional partnership firm and tax rate applicable to partnership firm will apply to the LLP. This amendment will take effect from 1st April, 2010 and will, accordingly, apply in relation to the assessment year 2010-2011 and subsequent years.
2. Scheme of Presumptive Assessment under section 44AD, cannot be availed by LLP. Thus, LLP need to maintain books of accounts, pay advance tax etc.
3. Income Tax Return shall be signed and verified by the designated partner of LLP and in case of any unavoidable reasons the designated partner of LLP is not able to sign the return or where there is no designated partner, then the return can be signed and verified by any partner of LLP. clause (cd) of Section 140.
4. New section 167C introduced for LLP. The new section provides that where any tax is due from a LLP in respect of any income of any previous year or from any other person in respect of any income of any previous year during which such other person was  LLP cannot be recovered, then, every person who was a partner of the LLP at any time during the relevant previous year shall be jointly and severally liable for the payment of such tax unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance r breach of duty on his part in relation to the affairs of the LLP. Though, the heading of section 167C states 'liability of partners of LLP in liquidation, the main provision does not provide that this provision can be invoked only in case of liquidation!
5. As an LLP and a general partnership is being treated as equivalent (except for recovery purposes) in the Act, the conversion from a general parternship 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 these conditions, he provisions of capital gain tax (section 45) shall apply.

This amendment will take effect from 1st April, 2010, and will, accordingly, apply in relation to the assessment year 2010-2011 and subsequent years.

To read features of Indian LLP (including income tax treatment), click here.