1. Which law will apply for TDS? On the date of deduction or on the date of bill? e.g. Bill dated 30th April 2020 is received for legal fees after lockdown and entry in books is made today i.e. in June 2020. Whether to deduct tax at old rate or new rate?

    Further no tax was deducted for March 2020 bills and now it is being deducted should it be at old rate or new rate?

    Ans. TDS is deductible at the time of credit in the books of account, or at the time of payment, whichever is earlier. Therefore, if there is no credit at an earlier date, tax would be deducted at the time of payment. If the 30th April bill is accounted for now in June 2020, assuming that it would be paid after this, tax would be deductible when it is accounted for in June 2020.

    Since tax would be deductible now in June 2020, tax deduction would be at the new rate.

    In case of March 2020 bills, if these bills are being accounted for in March 2020, tax was deductible in March 2020, and tax would be deductible at the old rates. However, if these bills are now accounted for in June 2020, tax would be deductible at new rates.

  2. A Pvt Ltd company was converted to LLP in July 2019. It had brought forward loss of 2 lakhs. Upto the date of conversion, the profit of the company is 50,000. How much of the loss is eligible to be set off and carry forward by the LLP?

    Ans. Section 72A(6A) provides that where a private company is succeeded by an LLP fulfilling the conditions laid down in the proviso to section 47(xiiib), the accumulated loss and unabsorbed depreciation of the predecessor company is deemed to be the loss and depreciation allowance of the successor LLP for the purpose of the previous year in which the business organisation was effected. The issue which arises is as to what is the quantum of unabsorbed loss of the company which becomes the loss of the LLP during the year of conversion – is it ₹ 2,00,00 being the accumulated loss at the end of the earlier previous year, or ₹ 1,50,000 after set off against the profits till the date of conversion?

    The company would be entitled to set off the brought forward loss against its profit till the date of conversion. Therefore, logically, only ₹ 1,50,000 would be the accumulated loss of the company, which would become the loss of the LLP during the year of conversion.

  3. In a Partnership firm consisting of two partners and one partner dies on 31st May 2020 and new partnership deed is made by and between existing firm with legal heir of deceased partner for continuation of partnership firm from date of death, as per clause in partnership deed providing for continuation of partnership in case of death of any partner with legal heir and firm shall not be dissolved.

Is there any deemed dissolution of the firm on the date of death of one partner and new partnership comes to existence? What are the implications under the Income tax Act?

Ans. The Supreme Court, in the case of Mohd. Laiquiddin v. Kamala Devi Mishra (deceased) by LRs, (2010) 2 SCC 407, held that on the death of a partner of a firm comprised of only two partners, the firm is dissolved automatically; this is notwithstanding any clause to the contrary in the partnership deed. The court took the view that Section 4 of the 1932 Partnership Act defines a ‘partnership’ as a contract between more than one person (since it uses the term ‘persons’). Therefore, if, in a firm comprised of only two persons as partners, one dies, the contract comes to an end. There cannot be any contract unilaterally without acceptance by the other partner.

In this case, the deed provided that the partnership was to continue for a period of 42 years and could be extended for a further 20 years at the option of the original defendant. Another clause in the partnership deed specifically provided that the death of any of the partners would not result in dissolution of the partnership.

The Supreme Court observed that if the legal representatives of the original plaintiff were not interested in continuing the firm or in constituting a new firm, they could not be asked to continue the partnership. There was no legal obligation on them to do so, as a partnership is not a matter of heritable status, but purely one of contract. Therefore, the firm stood dissolved on the death of one of the two partners.

In the facts of the query also, there is a dissolution of the partnership firm on the death of one partner. In case the legal heir of the deceased partner is admitted as a partner, this would constitute a new partnership firm.

Some of the implications from an income tax perspective are:

  1. The two firms would be regarded as separate entities with different permanent account numbers.

  2. The provisions of section 45(4) would get attracted to the capital assets on dissolution of the earlier partnership firm.

  3. The provisions of section 45(3) would apply to the capital assets of the earlier partnership firm introduced by the surviving partner of the earlier firm into the new partnership firm.

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