Taxation of an LLP

Taxation of an LLP under the Income-tax Act, 1961, as in force when the paper was set (it has since been replaced by the Income-tax Act, 2025):

1. "Firm" includes a limited liability partnership, "partner" includes a partner of an LLP and "partnership" includes an LLP (section 2(23)); an LLP is therefore assessed as a firm.

2. A partner's share in the total income of a firm separately assessed is exempt in his hands (section 10(2A)); the LLP's income is taxed once, in its own hands. His share is the part of the firm's total income in the same proportion as his share of the profits under the partnership deed (Explanation to section 10(2A)).

3. Salary, bonus, commission or remuneration to a partner who is not a working partner, and remuneration to a working partner or interest to any partner that the partnership deed (for an LLP, its agreement) does not authorise, are not deductible in computing the firm's income; authorised payments are deductible only within the limits of section 40(b): interest up to twelve per cent simple interest a year; and remuneration to working partners, in total for all partners during the previous year, up to the higher of Rs. 1,50,000 or 90 per cent of the first Rs. 3,00,000 of book-profit (Rs. 1,50,000 where there is a loss), plus 60 per cent of the balance of book-profit. Even an authorised payment is disallowed for any period before the date of the deed that authorises it, unless an earlier deed authorised it for that period; and an earlier deed's authorisation cannot reach back before that earlier deed's own date (section 40(b)(iii)).

4. Alternate minimum tax (sections 115JC and 115JEE). Where an LLP claims a deduction under section 10AA, section 35AD, or any section (other than section 80P) in Chapter VI-A under the heading "C.—Deductions in respect of certain incomes", and its regular income-tax is less than the alternate minimum tax, its adjusted total income (total income increased by those deductions, the section 35AD deduction being reduced by the depreciation allowable under section 32 as if no section 35AD deduction had been allowed) is deemed its total income and taxed at 18.5 per cent (9 per cent, under section 115JC(4), for a unit in an International Financial Services Centre deriving its income solely in convertible foreign exchange). The LLP must obtain an accountant's report, in the prescribed form, certifying the adjusted total income and the alternate minimum tax, and furnish it on or before the due date of its return under section 139(1) (section 115JC(3)). Section 115JEE(2) keeps the Chapter away only from an individual, an HUF, an AOP or BOI, or an artificial juridical person (section 2(31)(vii)) whose adjusted total income does not exceed Rs. 20 lakh; a firm is not among them, so the limit does not help an LLP. The credit is the excess of the alternate minimum tax paid over the regular income-tax of that year (any excess of foreign-tax credit under sections 90, 90A or 91 allowed against the alternate minimum tax over that admissible against the regular tax being ignored); no interest is paid on it; it is set off in a later year only to the extent the regular income-tax exceeds the alternate minimum tax, the balance being carried forward, but not beyond the fifteenth assessment year after the one for which it became allowable; and it is varied if an order changes either tax (section 115JD(2)-(6)). Section 115JEE(3) keeps this credit whatever sub-sections (1) and (2) say, and, save as the Chapter provides, all other provisions of the Act apply (section 115JE).

5. Conversion of a company into an LLP (section 47(xiiib)). A transfer of a capital or intangible asset by a private company or unlisted public company to an LLP, or of shares by its shareholders, on its conversion into an LLP under section 56 or 57 of the LLP Act is not a transfer for capital gains, but only if every condition of the proviso holds: all the company's assets and liabilities immediately before the conversion become the LLP's; all its shareholders become partners, with both their capital contribution and their profit-sharing ratio in the same proportion as their shareholding on the date of conversion; they receive no consideration or benefit, directly or indirectly, other than their share in profit and capital contribution; the aggregate of their profit-sharing ratios stays at not less than 50 per cent at any time during the five years from the date of conversion; total sales, turnover or gross receipts did not exceed Rs. 60 lakh, and the total value of the assets in the company's books did not exceed Rs. 5 crore, in any of the three previous years preceding the previous year of the conversion; and no amount is paid, directly or indirectly, to any partner out of the company's accumulated profit on the date of conversion for three years from that date.