1. An LLP is converted into a private limited company from 16th February 2019. Up to 15th February, LLP will be considered as an assessee and will need to file return. As per Companies Act, LLP loses its existence on 16th February; therefore, for the purpose of Companies Act, consolidated balance sheet of Company incorporating LLP accounts will be prepared.

LLP has loss so IT return of LLP will be filed with loss. In case of the company, consolidated final accounts will show loss of both LLP and part period of company.

How to prepare return? Do we need to prepare separate statement of profit & loss and balance sheet of company for income tax return? How to show loss of LLP to be carried forward to next year?

Ans. When an LLP is converted into a company, the LLP and the company are separate legal entities, having different Permanent Account Numbers. The LLP will have to file a return for the income or loss for the period up to 15th February, and the company will file a return for the income or loss for the period from 16th February to 31st March. The company will get the benefit of carry forward of the loss of the LLP on account of the provisions of section 72A(6), provided the conversion is exempt under section 47(xiii).

The LLP will prepare its accounts up to 15th February 2019, and its closing balances of assets and liabilities as of that date will become the opening balances of the company on 16th February 2019. However, the incomes and expenditures of the LLP till 15th February will remain those of the LLP, and will not be part of the statement of Profit & Loss of the company for the year, since this would include only income and expenditure from 16th February 2019. Both the LLP and the company will need to file their respective returns before the respective due dates under section 139(1), in order for the company to get the benefit of their respective losses.

2. A charitable trust registered u/s 12AA has as its objects, education, medical relief, the relief of poverty and advancement of any other object of general public utility. It had filed Form No 10 for accumulation of ₹ 5,00,0000 out of its income for AY 2017-18 before the due date of filing of its return of income. The purpose of accumulation stated in Form No 10 was “spending on education, medical relief, the relief of poverty and any other object of general public utility”. The resolution uploaded with the Form No 10 however specified certain medical educational and relief of poverty projects. The Assessing Officer proposes to disallow such accumulation on the ground that the specific purposes of accumulation have not been mentioned in Form No 10. Is this justified?

Ans. Under the provisions of section 11(2), where 85% of the income is not applied or deemed to have been applied to charitable or religious purposes in India but is accumulated or set apart for application to such purposes in India, such accumulated income is exempt subject to various conditions. One of the conditions is that the assessee furnishes a statement in form 10 to the assessing officer, stating the purpose for which the income is being accumulated and the period for which the income is to be accumulated, not exceeding five years. Since a trust can spend its income only on its objects, obviously the purpose of accumulation should be within the scope of the objects of the trust. The issue is whether the purpose of accumulation can be just the reproduced objects, or whether it has to be more specific in nature. There have been differing views on this issue taken by various courts, with most of the High Courts taking the view that so long as the purpose of accumulation is in accordance with the objects of the trust, even reproduction of the objects is permissible.

In this case, the resolution spells out the specific activities on which the trust proposes to spend the accumulation. A similar issue had arisen before the Gujarat High Court in the case of CIT(E) v. Bochasanwasi Shri Akshar Purshottam Public Charitable Trust 409 ITR 591, where the assessee passed a formal resolution specifying that funds were set apart for ongoing hospital projects of trust and for modernization of existing hospitals, without specifying the purpose of accumulation in form No. 10. The Gujarat High Court held that the assessee was entitled to the benefit of accumulation under section 11(2). The special leave petition against this order of the Gujarat High Court was dismissed by the Supreme Court, as reported in 263 Taxman 247. Therefore, so long as the resolution specifies the detailed purposes for which the accumulation is being sought, the assessee would be entitled to the benefit of accumulation.

3. A charitable trust registered u/s 12AA had applied an amount of ₹ 56 lakh towards charitable purposes out of its income of ₹ 60 lakh. It further claimed an accumulation u/s 11(1)(a) of 15% of its income at ₹ 9 lakh, and claimed a deficit of ₹ 5 lakh. The Assessing Officer proposes to limit the accumulation to ₹ 4 lakh, and deny the benefit of carry forward of deficit. Is this action justified?

Ans. Under section 11(1)(a), income derived from property held under trust wholly for charitable or religious purposes is exempt to the extent to which such income is applied to such purposes in India, and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart does not exceed 15% of the income from such property. In other words, the income can either be applied for charitable or religious purposes, or accumulated or set apart for spending for charitable or religious purposes; in either case, the income would be exempt. There cannot be a situation where the same income is both applied as well as accumulated, as that is a contradiction in terms. Therefore, it is only the surplus of the year (income less the expenditure, including capital expenditure), which qualifies for accumulation under section 11(1)(a), subject to the limit of 15% of the income. Such accumulation cannot therefore result in a deficit.

4. A Pvt Ltd was making losses for several years, and has started making profits in the last 2 years of about Rs 80 lakh per year. It expects to maintain the same level of profits for the next 3 years. Its turnover for the financial year 2017-18 was less than ₹ 400 crore. While it has set off all the unabsorbed losses, it still has unabsorbed MAT credit of ₹ 12 lakh. Should it opt for the rate of 22% under section 115BAA for AY 2020-21?

Ans. Assuming profit before tax is almost the same as book profits, the tax liability of A Pvt Ltd under normal tax provisions for AY 2020-21 would be ₹ 12 lakh (₹ 20 lakh, being 25% of ₹ 80 lakh, less MAT credit of ₹ 8 lakh). Under section 115BAA, its tax liability would be ₹ 19.36 lakh (₹ 17.60 lakh, being 22% of ₹ 80 lakh, plus 10% surcharge). It is therefore advantageous for it to continue under the normal tax rates for AY 2020-21. Assuming that the profits are again about ₹ 80 lakh for AY 2021-22, its tax liability under normal provisions would be ₹ 16 lakh (₹ 20 lakh less remaining MAT credit of ₹ 4 lakh), while its tax liability under section 115BAA would again be ₹ 17.60 lakh. For this year as well, A Pvt Ltd should continue with the normal rates of tax, and not opt to be covered by section 115BAA. It is only in the subsequent year that it should opt for the lower rate of 22% under section 115BAA.