Topic 55 Conversion Firm to LLP Schedule2

Module Overview

Section 55 read with Schedule 2 enables a registered partnership firm (under IPA 1932) to convert into an LLP. This topic analyses the eligibility conditions, step-by-step procedure, automatic succession of assets and liabilities, and the critical tax exemption under Section 47(xiiib) of the Income Tax Act.

Section 55

Subject to the provisions of this Chapter, a firm may convert into a limited liability partnership in accordance with the provisions of Schedule 2. Schedule 2 shall apply to such conversion.

Step-by-Step Procedure

Step 1: All partners pass a resolution consenting to conversion and authorising one or more partners to execute documents.

Step 2: File a statement in Form 17 with the Registrar, signed by all partners, confirming eligibility.

Step 3: Registrar verifies the application and issues a Certificate of Registration (Certificate of Conversion).

Step 4: Advertise the conversion notice in a vernacular-language newspaper and an English-language newspaper in the area of the registered office.

Step 5: File intimation with the Registrar of Firms for dissolution/de-registration of the original IPA firm.

Step 6: LLP comes into existence from the date of the Certificate of Conversion.

Effect

Details

Assets vest

All property, assets, interests, and rights of the firm vest in the LLP without any further deed or instrument

Liabilities transfer

The LLP is liable for all debts and obligations of the firm as if the LLP had incurred them

Contracts continue

All agreements and contracts continue as obligations of the LLP — no novation required

Legal proceedings

Pending cases may be continued by or against the LLP as if filed against the LLP

Partner reconstitution

All partners of the firm become LLP partners — their interests are reconstituted as LLP partnership interests

Tax Aspect

Treatment

Capital gains on conversion

Section 47(xiiib) IT Act — conversion is NOT a transfer; NO capital gains tax if ALL conditions met

Key conditions for exemption

All partners become LLP partners in same profit-sharing ratio; LLP does not convert back within 5 years

Losses carry forward

Losses and unabsorbed depreciation of the firm can be set off by the LLP

Stamp duty

Generally exempt — conversion is not a market-value transfer; state law varies

GST

No supply of goods/services involved; no GST implications

⚖ Smt. Geeta Devi v. ITO ITAT Jaipur (2018)

Held: The ITAT held that the capital gains exemption under Section 47(xiiib) IT Act is strictly conditional. A change in profit-sharing ratio at the time of conversion disqualified the exemption. All conditions must be simultaneously satisfied.

Principle: Section 47(xiiib) exemption requires strict compliance — any deviation (e.g., changed profit ratio) disqualifies the capital gains exemption for firm-to-LLP conversion.

📌 EXAM TIP: Firm-to-LLP: (1) Section 55 + Schedule 2; (2) Only REGISTERED IPA firms can convert; (3) All partners must become LLP partners; (4) No new persons can join simultaneously; (5) Tax: S.47(xiiib) IT Act — no capital gains if conditions met; (6) Assets vest automatically — no separate deed required; (7) Form 17 is the prescribed form.

Key Point

Core Content

Section 55 + Schedule 2

Conversion of registered IPA firm into LLP

Condition 1

Only registered firms (not unregistered) can convert

Condition 2

All partners must become LLP partners — no exclusions

Condition 3

No new partners can join simultaneously with conversion

Effect

Automatic succession — assets, liabilities, contracts vest without further deed

Tax — S.47(xiiib)

No capital gains if all conditions met; losses carry forward to LLP