The Income tax on conversion of a Private Limited Company to a Limited Liability Partnership shall be exempted on satisfying the following conditions :
- All the assets & liabilities of the company as on the date of conversion become the assets and liability of the LLP
- All the shareholders of the company as on the date of conversion become partners of the LLP.
- The capital contribution and profit sharing ratio shall be same that of the capital contribution of the company as on the date of conversion.
- The shareholders of the company should no way benefit either directly or indirectly in any form or manner other than by way of share & capital contributed in the LLP.
- Total gross receipts of the company shall not exceed 60 Lakhs INR in any of the three preceding previous years from the year in which the conversion takes place.
No capital gain shall arise from transfer of such conversion since the following shall not be regarded as a transfer on fulfilment of the above conditions.
- Any transfer of capital assets from the company to the LLP
- Any transfer of shares held by the shareholders of the converting company to the LLP
The claimed exemption shall be withdrawn and the exempted capital gain shall become taxable if any of the following shall take place:
- The aggregate profit sharing ratio of the shareholders of the converted company in the LLP shall not fall below 50% for five years from the date of conversion.
- No partner shall be paid any amount directly or indirectly from the accumulated profit standing in the balance sheet on the date of conversion for a period of three years from the date of conversion.
When there is a breach of the above conditions after conversion, the exemption shall be withdrawn and :
- Capital gains exempted in the hands of LLP on transfer of capital assets shall become taxable in the year of breach of condition
- Capital gains exempted in the hands of shareholders on transfer of shares shall be taxable in the year of breach of condition