The Hindu Business Line : Remedy worse than the disease

WHEN we ape the West, we do not necessarily adopt only the best practices or concepts of the developed countries. Confused thinking, imaginary fears and half-baked legal provisions also tend to infiltrate and pass off as pseudo-globalisation. Limited liability partnership is one of those ideas which has not made any significant headway in the countries of its origin — the UK and the US — and which has apparently been picked up for experimentation in India for lack of anything more novel. It is time the country turns down offers of discarded second-hand garments such as this, till it is able to stitch itself something more useful and really needed.

Time honoured Partnership Act

The Indian Partnership Act, 1932, which has been meeting the requirements of individuals in business and profession for over 70 years, can well be taken to have satisfactorily stood the test of time. It has surprisingly called for very few amendments. In simple terms it has accommodated all individuals, businessmen as well as professionals who were interested in a set-up in which the responsibility and liability were shared by all the participants jointly and severally.

What they contributed as their respective capitals in cash or kind and also the profit-sharing ratio on which they had agreed in their instruments of partnership determined the return from their individual investments and exertions. There was a risk of a partner's assets outside the partnership undertaking being appropriated against the un-discharged liabilities of the firm as in the case of a surety or a guarantor. But as long as the dominant partner was careful in the selection of his partners and the undesirable elements were weeded out, the interests of the firm were safe. The creditors and suppliers of a firm or even its customers and clients had a sense of security as long as their confidence in the partners — particularly those they dealt with — was undiminished.

To ensure that partners did not change or drop out without the knowledge of the public, legal recognition has been made available only to a firm which is registered with the Registrar of Firms — a statutory regulatory authority. A partnership can neither sue its debtors nor be sued by its creditors or other outsiders or even its partners unless it is registered.

In the past, registered firms were not chargeable to income-tax themselves. The partners were subjected to tax on their share in the firm's income, which was aggregated with the rest of their income in their individual assessments. When tax avoidance led to problems, the firm was made liable to tax, like a company, on every rupee of its own total income no matter whether it was registered or unregistered.

It will obviously be improper and unsustainable for any statute other than the Income-tax Act to provide for the tax treatment of partnership. It is unnecessary to emphasise that the firm cannot escape tax or any other liability, stemming from what has been done for it whether or not it has been done in its name or in any partner's name or in any assumed name.

The Concept Paper under consideration will be like Hamlet without the Prince of Denmark, if the Revenue Department in the Ministry of Finance has not been consulted by the Ministry of Company Affairs before or during its preparation. A major omission of the Naresh Chandra Committee, as evident from the report of the Committee itself, is that it had missed the opportunity of ascertaining the views of the I-T Department in the matter, though it recommended the `pass through' benefit in the assessment of LLP.

There is also no indication in the concept papers to show whether the Ministry of Company Affairs has taken the trouble to find out where the Revenue really stands in the matter.

It will turn out to be an exercise in futility if it has reckoned without a `stakeholder' who cannot be ignored in the long run.

The whole scheme will come a cropper if the Committee's recommendation is not acceptable to the Revenue or a partnership is likely to be subjected to a different treatment by the I-T Department. What is the sense of waiting for that Department's reaction till the `Cabinet summary' and the draft Bill for the LLP are circulated to all the Ministries?

Who really needs LLP

The Naresh Chandra Committee has pointed out: "Major accountancy firms wanting to limit the liability of an individual partner to acts specifically related to that partner, launched a campaign for the creation of the LLP vehicle in the UK in the 1980s. As a result, the UK Companies Act, 1989 was amended to allow accountancy firms to work as limited liability companies. The joint and several liabilities of general partners, however, remained. In the 1990s, the accountancy firms in the UK again campaigned to end this and to secure proportional liability in the LLP. This led to the passing of the Limited Liability Partnership Act in the year 2000." There are over 1,00,000 chartered accountants in India. Has the Institute of Chartered Accountants ever tired to find out how many of them are in favour of the proposed LLP Act in India? In the UK, as in the US, a few firms are dominating the scene. They are functioning almost as monopolies. The recent scandals involving Enron and a few other big companies have revealed that the auditors, who were responsible for the audit of the accounts of these companies, were bestriding the country like giants and the services that they rendered the audited companies were too many and too intimate for their own good or the good of the companies concerned in the final analysis.

Do we really want to encourage such practices in this country also? Should we not, as a policy, ensure that the cream is accessible to as many chartered accountants as possible and that their selection and appointment are rotated periodically so that they do not acquire `vested interests' in some group companies or conversely the large industrial houses do not hold them under their thumb by getting all kinds of `services' from or through them, paying them handsomely for such services? An Act on LLPs facilitating provision of diverse services for varying considerations through different `partners' in the same LLP will reduce the law and regulation under it to a mockery.

It will be self-deception if we assume that any other profession in India is seriously interested in a new vehicle for LLPs. It is not without significance that there is no publicised move for amendments to any statutes governing/regulating the different professions towards that end. There is enough scope for tax advice from statutory auditors of a company, to which the blind eye is shown by the Revenue and regulatory authorities.

An Act for LLP will widen the coverage. Will the I-T Department be able to reconcile itself to arrangements made by business houses to influence their auditors by engaging different `partners' of one LLP for different services? Since chartered accountants in India have not been exposed to situations like those which faced Andersons and other concerns in the US, for example, adverse criticism for provision of a multiplicity of services by the statutory auditors, what could have led them to demand a statute for LLP is intriguing.

(To be continued)

(By arrangement with Corporate Law Adviser, New Delhi.)