D.P. Mittal, Advocate
The Finance (No.2) Act, 2009, amended the definitions of the expressions firm and partner of the Income-tax Act, 1961, to include a Limited Liability Partnership (LLP) and its partners, respectively, as defined in the Limited Liability Partnership Act, 2008. The LLP is an AOP incorporated in accordance with the provisions of the LLP Act. The definition of ‘person’ in the Income-tax Act, 1961, includes ‘an association of persons or a body of individuals, whether incorporated or not’. In view of this, an amendment was not necessary and the LLP would have been taxed as an AOP. Commonality of the word ‘partnership’ under the LLP Act and Indian Partnership Act, 1932, does not make them similar so as to be given similar tax treatment. The author here has taken up this issue for discussion.
1. The Finance (No. 2) Act, 2009 amended the definitions of the expressions firm and partner of the
Income-tax Act, 1961, to include a
Limited Liability Partnership (LLP) and its partner, respectively, as defined in the Limited Liability Partnership Act, 2008. Consequential amendments also have been made in other provisions of the IT Act. The LLP and a general partnership have been accorded the same tax treatment; both to be taxed as a unit. Remuneration paid to partners is allowed deduction to the extent as provided in the Act in the computation of their income. Such remuneration is taxed in the hands of the partners as business income. Since the partnership and the LLP are conceptually different, the same tax treatment may create some practical problems in the administration of the Income-tax Act. The LLP is an AOP incorporated in accordance with the provisions of the LLP Act. The definition of ‘person’ in the IT Act includes “an association of persons or a body of individuals, whether incorporated or not. In view of this, the amendment was not necessary, and the LLP would have been taxed as an AOP. Commonality of the word ‘partnership’ under the LLP Act and Indian Partnership Act, 1932 does not make them similar so as to be given similar tax treatment.
2. An LLP has elements of partnership and corporation; partners having limited liability similar to that of shareholder of a corporation with a right to manage the business directly. The obligation of a partnership is its obligation, partners not being personally liable, directly or indirectly. Their liability is limited to the contributions made by each. In an LLP, their status is similar to shareholders in a corporation; while in a standard partnership, the relationship arises from the contract and not from the status.
An LLP validly constituted, on incorporation under the
LLP Act, becomes a body corporate, separate and distinct from its partners. This new legal personality emerges from the moment of incorporation and from that date the persons subscribing to the incorporation document and other persons joining as members are regarded as body corporate and the new person begins to function as an entity.
3. The LLP is a unique entity. In nature it is like a limited liability company although it may be distinguished from the entity by the fact that while an LLP generally has a legal existence independent of its partners, the partners take active role in its business. The difference between a company and an LLP is that while in a company internal governance is regulated by the statute, in an LLP it is by way of contractual agreement as is done in case of a standard partnership under the Indian Partnership Act. There are no board of directors, no meetings and no shareholders. The LLP has a partnership styled internal structure. The two essential conditions to be satisfied for a partnership are : (i) that there should be an agreement to share profits as well as losses of the business, and (ii) the business must be carried on by all or any of them acting for all. There must, therefore, exist the relation of principal and agent inter se, i.e., between members of the partnership for the purpose of carrying on the business law of partnership is simply a branch of general law of agency, each partner acting on behalf of the other. Every partner is the agent of the firm for the purpose of business and any act done by him binds it. Other partners are also bound, irrespective of whether they have sanctioned it. Partners manage the business themselves. The fact that the exclusive power and control by agreement of the parties, is vested in one partner or the further circumstance that only one partner can operate the bank accounts or borrow on behalf of the firm are not destructive of the theory of partnership and mutual agency, provided the said two conditions are satisfied. The LLP retains the partnership aspect in the mutual understanding but the legal relationship obtaining between the partners is transformed from, amongst partners under the Indian Partnership Act to that amongst partners under the LLP Act with rights and obligations and additional requirements under that Act. A new concept of designated partner is introduced who is responsible for the management and administration of the affairs of the LLP, i.e., doing all acts, matters and things required to be done and also responsible for filing of documents, returns, statement and report pursuant to the provisions of the Act.
The management of the
LLP affairs vests similarly in partners who are designated under the LLP agreement for the purpose, unlike in the case of a company where it vests not with the members but with the board of directors. The law of partnership provides that a partner has the right to take part in the conduct of the business, to have access to and inspect and copy any of the books of the firm, to express his opinion before the matters connected with the business are decided by the majority of the partners, but no change in the nature of business is made without the consent of all the partners; he is bound to attend diligently to his duties in the conduct of the business, entitled to be indemnified in respect of payments made and liabilities incurred by him in the conduct of business and doing acts for the purpose of protecting the firm from loss, not entitled to receive remuneration for taking part in the conduct of the business of the firm, to indemnify the firm for any loss caused to it by his fraud or by his wilful neglect in the conduct of the business, liable to account for the profit derived by him from any transaction of the firm, or from the use of the property, business connection or name of the firm or from the business carried by him which is of the same nature as and competing with that of the firm. The LLP Act provides almost similarly, if partners have not agreed differently in the LLP agreement.
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