Short Summary:
Ministry of Corporate Affairs has passed a notification on 31st May 2016 in such notification its allowed conversion of LLP into Company. For such conversion, there is need to prepare a list of documents and required to file the same with ROC in forms like URC-1, INC-7, DIR-12, INC-22 etc. While conversion there is need to consider the implications of income Tax provisions also like Capital Gain. In below-mentioned article author attempt to cover up the provisions of Companies Act and capital gain implication while conversion from LLP to Company.
Background:
Corporatization is the need of the hour. The entire world is gradually drifting towards one global market without any trade barriers between the countries. With the emergence of corporate work culture and promotional startup benefits, a great chunk of entrepreneurs are looking forward to corporatization. This step can be initiated in 2 ways as enumerated below:
1. Incorporation of a new corporate entity.
2. Conversion of existing entity (e.g. LLP/ Partnership Firm) into a Company.
The 2nd option of conversion of Limited Liability Partnership into a corporate entity might be practical for the existing entities to switch over from one mode of business to another. The process of conversion is a step by step procedure, which is a technical process but if handled with expert knowledge may be time and cost saving, as well.
There were no provisions under Companies act, 2013 regarding Conversion of Limited Liability Partnership into Company. Ministry of Corporate Affairs has passed a notification on 31st May, 2016 in such notification its allowed conversion of LLP into Company. These rules called as 'the Companies Authorized to register Amendment Rules, 2016.
Advantages:
NO CAPITAL GAIN:
The Gujarat High Court (HC) had held in the taxpayer’s case that conversion of a firm into a company was not a transfer (even before section 47(xiii) was introduced) and would not be subject to capital gains tax.
Process for Conversion
Note: Foremost Condition for Conversion is 'There should be 7 (seven) or more member in the LLP at the time of conversion'.
FIRST STEP: Hold a meeting of the partners to take assent of majority of its members summoned for the purpose of registering the LLP under Section 366 of the Companies Act, 2013.To authorize one or more partners to take all steps necessary and to execute all papers, deeds, documents etc. pursuant to registration of the LLP as a Company.
LLP Have to apply for Availability of the Name in INC-1.One of the major advantages is that the business can be run under the same name as that of the LLP except that in addition to the name of the LLP the words ‘limited’ or ‘private limited’ has to be added
SECOND STEP: On obtaining the approval of Name, file the following belowForm along with required documents with the registrar of Companies within 60 days from the date of name approval.
List of Documents required filing with Roc:
E-form URC-1
The company required to file e-form URC- 1 along with all the below mentioned documents:
i. a list showing the names, addresses, and occupations of all persons named therein as members with details of shares held by them
ii. a list showing the particulars of persons proposed as the first directors of the company
iii. an affidavit from each of the persons proposed as the first directors, that he is not disqualified to be a director under sub-section (1) of section 164 and that all the documents filed with the Registrar for registration of the company contain information that is correct and complete and true to the best of his knowledge and belief
iv. a list containing the names and addresses of the partners of the Limited Liability Partnership
v. copy of LLP Agreement
vi. a statement of assets and liabilities of the Limited Liability Partnership duly certified by a chartered accountant in practice which is made as on a date not earlier than thirty days of the filing of form no.URC-1
vii. a copy of latest income tax return of the Limited Liability Partnership
viii. an undertaking that the proposed directors shall comply with the requirements of Indian Stamp Act, 1899 (2 of '1899)
ix. written consent or No Objection Certificate from all the secured creditors of the applicant
x. written consent from the majority of Partners
xi. a statement specifying the following particulars:
o the nominal share capital of the company and the number of shares into which it is divided;
o the number of shares taken and the amount paid on each share;
o the name of the company, with the addition of the word 'Limited' or 'Private Limited' as the case may require, as the last word or words thereof;
E-form INC-1 / DIR-12 / INC-22
Company required to file e-form INC-7/ DIR-12/ INC-22 along with URC-1 as linked form with all the attachment as required in normal Incorporation of Company like:
xii. MOA & AOA
xiii. INC-9
xiv. INC8
xv. Undertaking for non-acceptance of Deposit
xvi. DIR-2 etc.
Conclusion:
There are various ways of converting a firm to a company, viz; slump sale, itemized sale, admitting the company as a partner, dissolution thereof and on dissolution, business being taken over by the company etc., In view of the choices available. Conversion should be made in a manner appropriate to a particular situation and in a way which is most beneficial.
INCOME TAX- CAPITAL GAIN RULINGS ON CONVERSION:
In decision of the Bombay High Court in CIT v Texspin Engineering and Manufacturing Co. (2003) 263 ITR 345 (Bom) has held that such conversion of firm into company by following the route under Part-IX of the Companies Act, 1956, does not occasion capital gains, since there is no transfer involved in such a case. The High Court after considering the provisions of Companies Act, provisions of income tax relating to capital gains and relying on the ratio of Malbar Fisheries Company v CIT (1979) 120 ITR 49 (SC), CIT Vs. George Henderson & Co Ltd (1967) 66 ITR 622 (SC), CIT Vs. Gillanders Arbuthnot & Co (1973) 87 ITR 407 (SC), held that, when a firm is registered as a company, as per the procedure prescribed under Part IX of the Companies Act, no capital gains arise to the firm. When a partnership firm is treated as limited company, under Part IX of the Companies Act, the properties of the erstwhile firm vests in the limited company as they exist. There is no dissolution of the firm. Hence section 45 (1) of the Income Tax Act is not applicable. When shares of the Company are allotted to partners in consideration of capital standing in their accounts in the firm, there is no transfer of capital assets as contemplated under section 2(47)(iii) of the Income Tax Act (i.e. compulsory acquisition, thereof under any law), as partners are getting their own right to share Capital.
In Well Pack Packaging Vs. Dy. CIT (2003) 78 TTJ (Ahd.) 448, also the same view was taken that, corporatisation of the firm under the part IX route did not attract liability to Capital Gains in the hands of the firm.
In Vali Pattabhiram Roa v Shri Ramanuja Ginnning & Rice Factory (P) Ltd. (1986) 60 Comp cas 568 (AP), the Court has held that there is no transfer under general law if the constitution of the firm is changed to that of a company by registering it under Part IX of the Companies Act, as there shall be statutory vesting of title of all the properties of the firm in the newly incorporated company without any need for a separate conveyance.
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