Does the merger of an LLP into a company facilitate the “Ease of Doing Business”?
- Blog|Company Law|
- 4 Min Read
- By Taxmann
- Last Updated on 17 November, 2022
“…it is concluded that the legislative intent behind enacting both the LLP Act 2008 and the Companies Act, 2013 is to facilitate the ease of doing business and create a desirable business atmosphere for companies and LLPs. For this purpose, both the Acts have provided provisions for merger or amalgamation of two or more LLPs and Companies. The issue involved in the present petition has been categorically dealt with by the Companies Act, 1956 but there is no specific provision in the Companies Act, 2013. Therefore, this is the clear case of casus omissus. If the intention of the parliament is to permit a foreign LLP to merge with an Indian Company, then it would be wrong to presume that the Act prohibits a merger of an Indian LLP with an Indian Company. Thus, there does not appear any express legal bar to allow/sanction merger of an Indian LLP with an Indian Company.”
Capital gains tax implications in the hands of the LLP
As per section 45 of the Income-tax Act, 1961 (the ITA), the profits or gains arising from the transfer of a capital asset is chargeable to income-tax under the head “Capital gains.” The assets of the LLP stand vested in the Company upon merger, and accordingly, the tax authorities may regard it as the transfer of a capital asset; hence, it is chargeable to capital gains. As per section 48 of the ITA, the income chargeable under the head “Capital gains” is computed by deducting the cost of acquisition of the asset from the full value of the consideration received or accruing as a result of the transfer of the capital asset. Accordingly, one needs to ascertain the consideration received by or accruing to the LLP as a result of the said merger.
“It is true that in a case of amalgamation, there is a share exchange ratio prescribed according to which the shareholders of the transferor company would be entitled to the shares of the transferee company. ……, it would appear that in an amalgamation, no consideration in any form much less in the form of money—flows from the transferee company to the transferor company, which was the erstwhile owner of the assets. The shares are issued by the transferee company, not to the transferor company, but to the shareholders of the transferee company, who must necessarily be treated as distinct from the transferor company itself. The shareholders of the transferor company could not be deemed in law to be the owners of the assets of the transferee company, nor can they be said to have held any interest in the assets of the transferee company….”
Capital gains tax implications in the hands of the partner of the LLP
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