Impact of opening LLP route for Chartered Accountants

Recent Changes

Pre-amendmend Legal Position

As per section 2(7)(c) of the Companies Act 1956, the Central Government may by notification, notify that a Body Corporate, will not be recognized as Body Corporate for the purpose of the Companies Act 1956.

The text of section is given below:
s. 2(7)  “body corporate” or “corporation” includes a company incorporated outside India but does not include—
(a)  a corporation sole ;
(b)  a co-operative society registered under any law relating to co-operative societies ; and
(c)  any other body corporate (not being a company as defined in this Act), which the Central Government may, by notification in the Official Gazette, specify in this behalf ;

On the other hand, Section 226 (3) of the Companies Act 1956 provides for the disqualification for appointment of auditor of a company and as per clause (a) of this sub section, a body corporate cannot be appointed as Auditor

Notifications by MCA

MCA vide its notification dated 23-5-2011, has, in exercise of its powers under 2(7)(c) of the Companies Act 1956,notified that LLP, which is  a Body Corporate as per the Limited Liability Partnership Act 2008, shall not be treated as Body Corporate, for the purpose of section 226(3)(a) of the Companies Act 1956,

Thus MCA by its aforesaid notification has taken LLP out of the purview of the Body Corporate under this sub section and therefore, LLP can be appointed as the Auditor of the company.

Further MCA vide its circular no No 10/2011 dated 04/04/2011 has allowed CA/CS/CWA to practice under LLP in partnership with other fellow members of same institute and in case of CS, also with members of such recognized profession as may be prescribed.

Announcement made by ICAI

However all these notifications are fruitless unless the body governing the professions make suitable changes. Hence as a major squeal to notifications issued by MCA, a press note has been released  by ICAI on 19-7-2011 published in Times of India which says that ICAI has allowed firms to convert into LLP. But one firm can have one name only E.g. a firm having name as XYZ can not not set up different firms in name of XYZ India, XYZ Delhi, XYZ Mumbai. The rules for the same are yet to be announced by ICAI.

Impact of Opening of LLP Route for Big Fours

The impact of this move on entry of multinational accounting firms (MAFs) in areas prohibited till date is yet to be perceived. Under WTO agreements India is under no compulsion to allow multinational accounting firms to enter into area of auditing, accounting, taxation and legal services, hence ICAI regulations  prohibit MAFs to enter these areas. So MAFs approach auditing work as international firms and sign Balance Sheets as Indian firms. The new regulations will have special impact in India on operations of PWC which is the only global firm allowed to operate in India with its original brand name i.e. Price Waterhouse. But since not more than 20 partners are allowed, PWC is operating with the help of other firms like Lovelock & Lewis etc. and hence may form LLP with its original brand name. Amongst other MAFs

-           E & Y is operating through S.R. Batliboi,

-           Deloitte is operating through A.F. Ferguson ,C.C. Chokshi, Fraser and Ross,S.B. Billimoria,

-           KPMG is operating through BSR (formerly Bharat S. Raut).

 ICAI had in June 2010 sought details from 94 chartered accountants firms about their arrangement with the international accounting firms. However, a number of firms have not furnished complete information as asked for by the ICAI. The reply from some of the firms is silent as to whether any payments is being made to obtain the licence to use the brand name. In Feb, 2011 ICAI suggested MAFs not to engage in buy out of Indian firms, rather to recognize a few small firms in each region and do hand holding and improve their quality. Since ICAI is finding it difficult to have information about international affiliations of Indian firms, the multinational firms may use LLP route and become audit giants in India. AT present MAFs are largely engaged in consulting business in India only and audit revenues are only 25% of their total revenues from India. LLP route may help big fours to consolidate their audit operations in India.

Impact of Opening of LLP Route for Small Firms

                                                                                For small CA firms LLP route is beneficial only if multiple disciplinary firms are allowed to be formed. The basic spirit being promoting the idea to frame LLP among professionals is to enable capacity building of CA firms by forming multi disciplninary firms. Vide CA Amendemend Act, 2006 , w.e.f. 17-11-2006, Schedules appended to CA Act were modified especially clause (2),(3),(4) and clause(5) of of Part I of Fist Schedule to CA Act were amended to provide room for allowing sharing of fee, profits and form partnership  with members of other professional bodies or persons having prescribed qualifications. There after it took two more years to prescribe the relevant qualifications notified through notification no. Na.1-CA(7)/116/ 2008 dated 25-9-2008 :

The qualifications to share profits / remunerations / commission / brokerage etc. [Regulation 53A] (for clause (2),(3) of Part I of First Schedule

(i) Company Secretary within the meaning of the Company Secretaries Act, 1980;

(ii) Cost Accountant within the meaning of the Cost and Works Accountants Act, 1959;

(iii) Actuary within the meaning of the Actuaries Act, 2006;

(iv) Bachelor in Engineering, from a University established by law or an Institution recognised by law;

(v) Bachelor in Technology from a University established by law or an Institution recognised by law;

(vi) Bachelor in Architecture from a University established by law or an Institution recognised by law;

(vii) Bachelor in Law from a University established by law or an Institution recognised by law;

(viii) Master in Business Administration from Universities established by law or technical institutions recognised by All india Council for Technical Education.

Prescribed qualifications of a eligible partner who is not a member of ICAI [Regulation 53B] (for clause (4) of Part I of First Schedule

(a) Company Secretary, member, The Institute of Company Secretaries of India, established under the Company Secretaries Act, 1980;

(b) Cost Accountant, member, The Institute of Cost and Works Accountants of India established under the Cost and Works Accountants Act, 1959;

(c) Advocate, member, Bar Council of India established under the Advocates Act, 1961;

(d) Engineer, member, The Institution of Engineers, or Engineering from a University established by law or an Institution recognized by law.

(e) Architect, member, The Indian Institute of Architects established under the Architects Act, 1972;

(f) Actuary, member, The Institute of Actuaries of India, established under the Actuaries Act, 2006.

(g) Professional bodies or Institutions outside India whose qualifications relating to accountancy are recognised by the Council.

However the forming of multi- disciplinary firms shall become reality only if suitable

amendmends are made in CA Act. For this section 2(2) of CA Act shall have to be amended which

defines CA deemed to be in practice. At present a CA is deemed to be in practice only if he individually or in partnership with CA in practice engages himself in the practice of accountancy , performs audit , renders professional service in matters relating to accounting procedures or renders services prescribed by council. This definition shall have to be suitably amended to provide that CA shall be deemed to be in practice only if he engages himself in aforementioned occupation individually or with CA in practice or with persons possessing prescribed qualifications. However a multi disciplinary firm can not be auditor of a company because as per proviso to section 226(1), only a firm having all the partners practicing in India who are chartered accountants can be appointed as auditor of the company.

Tax Implications on Conversion of firm into LLP for CA Firms

- As per memorandum explaining provisions of Finance Bill 2009, since firm and LLP are equivalent, there shall be no tax for conversion from firm to LLP provided rights and obligations of partners  remain same and there  is no transfer of assets or liablilites. Otherwise  s. 45 shall apply.

- Share in profit of partners of LLP shall be exempt u/s 10(2A)

- LLP partners shall  be allowed interest up to 12% only u/s 40(b) and remuneration shall be subject to limits laid down under that section

- If any partner of LLP leaves the LLP proportionate loss shall not be carried forward u/s 78

- U/s 140 an amendmend was made to provide that return of LLP shall be signed by designated partner or where designated partner is not able to sign or there is no designated partner, ITR shall be    signed by any partner not being minor

- Recovery of Tax u/s 167C; This section was introduced to provide that where tax due from LLP can not be recovered, it shall be recovered from every person who is partner of LLP at any time during 

relevant previous year jointly and severally unless he proves that non recovery is not attributable to gross neglect, breach of duty, misfeasance.

- 18.5 % alternate minimum tax on adjusted total Income (Total Income + Deductions under Chapter VI-A) where tax on total income is less than alternate minimum tax together with carry forward of tax credit for 10 asstt years.

The recent initiatves being taken for opening of LLP sector for professionals is going to having far reaching consequences in times to come. Further instead of making piecemeal changes, joint working group of ICAI and MCA should recommend and make the necessary changes at one go.