12 March 2021
An LLP has an existing shareholding pattern of 95:5 ( by A & B) with Capital contribution @ 10L. Now a new partner (C) is joining the same & 1 of the existing partner is retiring & the other partner is also selling his stake. The New Partners - A & C New Shareholding - 50:50. But C is buying the stakes of A & B for a total Sum of 25L.
So what will be the Accounting effect for the same in the books of LLP & partners & how the gain on sale of shareholding needs to be booked at & at what rate it will be taxable ?
06 July 2024
The scenario involves changes in the shareholding structure of an LLP where a new partner (C) is joining and acquiring the stakes of existing partners A and B. Here's how the accounting and tax implications can be approached:
### Accounting Treatment in LLP's Books:
1. **Sale of Stakes by A and B:** - **Book Value Consideration:** Determine the book value of the stakes sold by A and B. This is typically based on the capital contribution and any accumulated profits or losses allocated to their capital accounts. - **Accounting Entry for Sale:** Assuming the sale proceeds are 25L (total), and considering the new shareholding ratio of 50:50 between A and C: - Debit: Bank Account (for the amount received - 25L) - Credit: A's Capital Account (for A's share of capital and accumulated profits/losses) - Credit: B's Capital Account (for B's share of capital and accumulated profits/losses) - Credit: Gain on Sale of Stakes Account (if any gain exists, it will be credited here)
2. **Adjustment for New Partner C:** - **Entry for C's Contribution:** Assuming C contributes 10L (similar to A and B's initial contribution): - Debit: Bank Account (for the amount contributed - 10L) - Credit: C's Capital Account (for C's initial capital contribution)
### Tax Implications:
1. **Tax on Capital Gains:** - **Calculation:** Calculate the capital gains for A and B on the sale of their stakes. Capital gains are typically computed as: - Sale Proceeds - Cost of Acquisition (book value) - **Tax Rate:** Capital gains on sale of shares held for more than 3 years are taxed at 20% with indexation benefit. For shares held for 3 years or less, gains are taxed at applicable slab rates.
2. **Reporting and Compliance:** - **Income Tax Return:** A and B will need to report the capital gains in their income tax returns for the relevant assessment year. - **Tax Payment:** Ensure timely payment of taxes on capital gains as per income tax regulations.
### Accounting for Gain on Sale:
- **Nature of Gain:** The gain on sale of shares is typically treated as capital gains in nature unless the shares were held as stock-in-trade (in which case it would be business income). - **Booking Gain:** Credit the Gain on Sale of Stakes Account in the LLP's books and subsequently allocate this gain to the respective partners (A and B) as per their profit-sharing ratio.
### Conclusion:
The LLP should ensure proper documentation and compliance with both accounting standards and tax regulations regarding the sale of stakes by A and B and the entry of new partner C. This includes accurate valuation of shares, calculation of capital gains, and proper recording of transactions in the LLP's books.
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