CA R.V. Shah

1. As per Section 139A of the Income-tax Act, 1961, it is mandatory for almost every Assessee to have Permanent Account Number (PAN) which is a ten digital alphabet number issued by the Income-tax department.

2. It acts as an identifier for the “person” with the tax department. It is mandatory to quote PAN on return of income, all correspondence with Income-tax Authority.

3. PAN can be obtained by filing an application in Form 49A / 49AA as applicable.

When Limited Liability Partnership (LLP) have to file its Annual Return?

As per Section 139 of Income-tax Act, 1961, a Partnership Firm / LLP has to mandatory file the return of income.

LLP has to file its return by 31st July of the Assessment Year. LLP which has to get their accounts audited have to file their return of income by 31st October of the assessment year.

Maintenance of Books of Account

As per Section 44AA of the Income-tax Act, 1961 read with Rule 6F of Income-tax Rules, 1962, the books of account and other documents to be maintained are: (i) cash book; (ii) a journal, if the accounts are maintained according to the mercantile system of accounting; (iii) a ledger; (iv) Carbon copies of bills, (v) original bills and payment vouchers.

In the case of Smt. Kiran Lata v. ITAT 318 ITR 44/177 Taxman 420 (Uttaranchal) (HC), it was held that merely because Section 44A of the Income- tax Act, 1961, nor where provides that books of account maintained by a professional must be based on Valuation Report of technically qualified person, it would mean that whatever has been shown by assessee in his books of account must be taken as a gospel truth.

Does the Limited Liability Partnership have to get their accounts audited:

As per Section 44AB of the Income-tax Act, 1961, Limited Liability Partnership having sales, turnover or gross receipts over rupees one crore has to get their accounts audited. However, where the receipts and payments are less than five percent of gross receipts and gross payments, respective, the turnover criterion is Rs. 10 crore instead of rupees one crore.

A Limited Liability Partnership claims to declare a lower amount of income than the deemed income as per the provisions relating to presumptive income under the Income-tax Act, 1961 has to get their accounts audited.

Where the Limited Liability Partnership is carrying on profession, the gross receipts criterion shall be rupees fifty lakhs. Further, where the Limited Liability Partnership is carrying on profession and claims to declare a lower amount of income than the presumptive income as per Section 44ADA of the Income-tax Act, 1961 has to get their accounts audited.

Consequences in failure to get accounts audited:

As per Section 271B of the Income-tax Act, 1961, if any person fails to get his accounts audited, the Assessing Officer may direct that such person shall pay, by way of penalty, a sum equal to one- half percent of the total sales, turnover or gross receipts, as the case may be.

Deduction of tax at source / collect tax at source:

The provisions of Tax Deducted at Source is applicable to Limited Liability Partnership.

Tax Collection at Source (TCS):

Section 206C of the Income-tax Act, 1961 was introduced vide Finance Act, 1988 to as a consequences to Section 44AC of the Income- tax Act under the head special provision for computing profits and gains from the business of trading in certain goods.

As per the Scheme, the Seller of certain specified goods, at the time of sale, is required to collect a tax in the form of percentage of sales from the buyer. The Seller is then required to deposit the same with the Government. The buyer of the goods is allowed the credit of the tax paid in the same year.

It is an anti-abusive provision, LLP is not exempted for Tax Collected at Source compliances.

A Limited Liability Partnership has to mandatorily file the following before the Ministry of Corporate Affairs,

LLP Form II, i.e, Annual Return:

LLP Form 08: Statement of Accounts and Solvency

Delay in filing or non-filing can attract penalty on the LLP and on the Designated Partner. Further, the Ministry of Corporate Affairs can issue a notice to initiate legal proceedings such as striking off the entity from the registry.

Applicability of Section 269SS of the Income-tax Act, 1961:

The provisions of Section 269SS of the Income- tax Act, 1961 will be applicable to the capital contributions made by a Partner to a Partnership Firm in cash.

Partner can also introduce capital by way of immoveable property. If the property is being conveyed to the Limited Liability Partnership, then Section 45(3) of the Act, 1961 would be applicable.

Applicability of Section 68 of the Income-tax Act:

Section 68 of the Income-tax Act, 1961 cannot be made applicable to LLP provided the Partners are able to justify the creditworthiness of the investment and genuineness of the transaction.

In case of Keshavani Sheetalaya Sahsaon v. CIT (2020) 116 Taxmann.com 382/274 Taxman 25 (Allahabad High Court) where assessee firm had shown credits of certain amount from its Partners, since Partners of assessee were all identifiable and separately assessed to tax and had shown sufficient agricultural income in their personal returns of past years which had been accepted by the Department as such, source of investment by those Partners in assessee firm having been explained, no addition could be made in the hands of firm on account of such credits. In the case of Principal CIT v. Vaishnodevi Refails & Solvex [2018] 89 Taxman.com 80/253 Taxman 135 (Guj.), CIT v. Vaishnodevi Refoils & Solvex 257 Taxman 440 (SC) wherein it was held that where AO made addition to the assessee firm’s income under Section 68 in respect of capital introduced by one Partner of firm, in view of fact that amount received by assessee firm had been duly reflected in books of account maintained by concerned partner and he had also confirmed such contribution, impugned addition was to be set aside.

Whether “source of source” rule under Section 68 of Income-tax Act, 1961 applicable to LLP?

Section 68 of the Income-tax Act, 1961 pertains to unexplained cash credit. It is important to note that the First Proviso to Section 68 of the Income- tax Act, i.e., the “Source of Source” was introduced via the Finance Act, 2012, 1st April, 2013.

The provision of Section 68 is applicable where the sum so credited consists of Share Application Money, share capital, share premium etc.

Section 68 of the Income-tax Act provides that the nature and source of any sum credited, as share capital, share premium etc. in the books of closely held company shall be treated as explained if the source of funds is also explained by the assessee Company in the hands of resident shareholder. Therefore, the source of source rule under Section 68 is not applicable to LLP.

Section 68 with effect from Assessment Year 2023-24:

First proviso to Section 68 has been inserted from assessment year 2023-24. It provides that where sum so credited consists of loan or borrowing or any such amount, by whatever name called, any explanation offered by such assessee shall be deemed to be not satisfactory unless:

1. The person in whose name such credit is recorded in the books of such assessee also offers an explanation about the nature and source of such sum so credited; and,

2. such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory.

In short, where the sum so credited in the books of an assessee consists of loan or borrowings or any such amount by whatever name called and any explanation offered by such assessee shall not be considered satisfactory unless the person in whose name such credited is recorded in the books of account of the assessee and offers explanation about the nature of such so credited. It mean the assessee has explained source of source for such credit in the books of the assessee. If such explanation offered by the assessee in the opinion of the Assessing Officer is not found satisfactory then such sum, i.e., cash credit shall be added in the total income of the assessee.

Are the provisions of Benami Transactions (Prohibition) Act, 1988 applicable on introduction of capital in a Partnership firm? The application of the Benami Transactions (Prohibition) Act, 1988 would be on the basis of the genuineness of the Partnership firm.

In Sardar Machhisingh v. CIT 144 Taxman 8 (MPHC), the Hon’ble High Court held that where cash credits in the names of 13 Partners were held not to be genuine, there was no genuine firm in existence and the concern was nothing but a benami concern of the assessee and the income so earned by the firm was assessable in the hands of the assessee.

Concept of Partnership Law:

1. The concept of partnership law is that a firm is not an entity or person in law but only a compendious mode of designating persons who have agreed to carry on business in partnership;

2. A firm as such is not entitled to enter into partnership with another firm or individual as the definition of “person” in Section 3(42) of the General Clauses Act, 1897, cannot be imported into Section 4 of the Indian Partnership Act.

3. The law, English as well as Indian has for some specific purposes relaxed its rigid notions and extended a limited personality to a firm.

4. Under the income-tax law a firm is an independent and distinct juristic person for the purpose of assessment as well as recovery of tax as it is a “person” within the meaning of Section 2(31) of the Act, having its own entity and personality. It is also a separate entity under the Sales Tax Law.

5. It is well settled that it so open to any person to arrange his or its affairs by adopting a legal device to reduce his or its tax liability to the minimum permissible under the law and such a device cannot be equated to an attempt to evade tax as long as his or its action is consistent but not contrary to law. Refer: CIT v. Shivakasi Match Exporting Co. 53 ITR 204 (SC).

6. In law, there is no prohibition for the creation or existence of two or more separate firms or partnerships, by the same partners.

7. Where a firm is genuine or bogus or benami is a pure question of facts. But whether two or more partnerships or firms constituted under different deeds are, in reality, only one partnership or not is a mixed question of fact and law.

8. The prime guideline to determine this latter question is the cumulative effect or the totality of all the material factors relating to the object and intendment of the partnerships and businesses, their nature, character and identity, coupled with the factum or otherwise or interlacing and interlocking of funds between the two firms.

9. The very question as to whether there was really one partnership or two different assessable entities being two separate distinct partnerships unconnected with such other, has to be determined by the Income-tax Authorities for the purpose of computing the assessment under the Income-tax Act but not under the general law governed by the provisions of the Partnership Act.

10. The finding of the Tribunal about the object and intendment of the partnerships and the businesses and the factum or otherwise of the interlacing and interlocking of the funds between the two partnerships is a question of fact and such finding would be binding on the High Court in a reference unless there is no material in support of it.

11. The Supreme Court in case of CIT v. G Parthasarthy Naidu 236 ITR 350 (SC) where it was held that where the Partners of assessee – firm created another separate distinct firm, under separate partnership deed to carry on other business, they were different legal entities for purpose of assessment.

12. Section 9B of the Income-tax Act, 1961 was introduced retrospectively with effect from Assessment Year 2021-22. The newly inserted law has opened a Pandava’s box of queries and issues Hon’ble Supreme Court in case of Chhotabhai Jethabhai Patel & Co. v. Union of India 1962 AIR 1006, 1962 SCR Suppl (2)1 has held that if a power to impose taxation has been conferred by the Constitution then the legislature could equally make the law retroactive and impose the duties from a date earlier than the date form which it was imposed.

13. Section 9B of the Income-tax Act, 1961 is only applicable on reconstitution or dissolution of the specified entity. Therefore, if any capital asset or stock in trade is distributed in absence of reconstitution or dissolution of the specified entity, Section 9B of the Income- tax Act, 1961.

As per Section 9B(2) of the Income-tax Act, 1961 shall apply and the deemed transaction shall be chargeable to Income-tax as income of such specified entity under the head “Capital Gains” in accordance with the provisions of the Income-tax Act, 1961. Therefore, since transfer of rural agricultural land is not a capital asset, distribution / deemed transfer of the same would not attract any capital gain tax on the specified entity.

Section 9B(2) of the Income-tax Act, 1961, the deemed transaction shall be chargeable to income-tax as income of such specified entity under the head “Profits and Gains of Business or Profession” or under the head “Capital Gains” in accordance with the provisions of Income- tax Act, 1961. The deemed transaction shall be chargeable to income-tax as income of the Income-tax Act, 1961.

Therefore, the expenses / deductions available under the head income from Business and Professions should be allowed. The computation mechanism for capital gains under the Income- tax Act, 1961 will be followed and statutory deductions will be allowed.

Capital Gains on transfer of self- generated and self-generated goodwill as per Section 9B:

The Book value of the self-generated asset or self-generated goodwill is immaterial. In the event where on reconstitution or dissolution of a specified entity, a self-generated asset is distributed to a specified person, then the entire sum will be taxable as capital gains, taking the cost of acquisition as nil.

As per Rule 8AA of Income-tax Rules, 1962, transfer of a self-generated asset or self-generated goodwill is deemed to be a short term capital asset for the purpose of computing capital gains under Section 45(4) of the Income-tax Act, 1961. However, such a deeming provision does not exist, therefore, the capital gains on transfer of self-generated asset or self-generated goodwill can be both. Long-term capital gain or short term capital gain, Section 9B and Section 45(4) of the Income-tax Act, 1961 were both introduced via Finance Act, 1961 were both introduced via Finance Act, 1961. There are instances where both the provisions will come into play. Both Section 9B and Section 45(4) of the Income-tax Act, 1961 will be applicable on distribution of capital assets to a specified entity on account of reconstitution of the specified entity.