Topic 07 Naresh Chandra Committee II 2005

THE LEGAL BRIDGE

Judiciary Examination Study Material

Topic 7

Naresh Chandra Committee II (July 2005)

Building Policy Momentum for LLP Legislation

Pillar 1 — Historical Foundation & Legislative Background

Module Overview

This topic examines the second Naresh Chandra Committee (July 2005) — a body that is frequently confused with the 2003 committee but is legally and functionally distinct. We trace the committee's constitution, its specific contribution to the LLP legislative momentum, and why this second committee was necessary despite the work already done by the J.J. Irani Committee in the same year.

7.1 The Two Naresh Chandra Committees — Definitively Distinguished

Side-by-Side Comparison

COMMITTEE I (2003): "Expert Committee on Regulation of Private Companies and Partnerships." Year: 2003. Role: First governmental recommendation for LLP in India. Scope: Service sector only. Impact: Planted the LLP concept.

COMMITTEE II (July 2005): Separate committee, also chaired by Naresh Chandra. Year: July 2005. Role: Advanced inter-ministerial consensus and provided additional policy arguments for a standalone LLP law. Impact: Created the institutional momentum that directly triggered the LLP Bill 2006.

7.2 Why a Second Committee Was Needed

One might reasonably ask: if the J.J. Irani Committee had already addressed LLP in 2005, why was a second Naresh Chandra committee also working on the subject in the same year? The answer lies in the bureaucratic and inter-ministerial dynamics of Indian policy-making:

Multiple stakeholders, multiple channels: The Ministry of Corporate Affairs, the Finance Ministry, the Law Ministry, and professional regulatory bodies (ICAI, Bar Council) had competing views on LLP scope, taxation, and professional regulation. A separate committee with credibility across these ministries was needed to build consensus.
J.J. Irani Committee was primarily a Company Law committee: Its LLP recommendations were secondary to its main Company Law reform mandate. The Naresh Chandra Committee II specifically kept LLP legislation as its primary focus, giving it greater policy weight within the MCA.
Timing: The J.J. Irani report and the Naresh Chandra II report were submitted roughly simultaneously (both 2005). Together, they created a double-barrelled policy push — making it politically difficult for the government to delay LLP legislation further.

7.3 The "Three-Stage Consultative Pre-Legislative Process"

The sequence of committees leading to the LLP Act, 2008 is remarkable in Indian legislative history for its thoroughness. It can be summarised as a three-stage process:

Stage	Committee	Year	Function
Stage 1 — Concept	Naresh Chandra Committee I	2003	Introduced the LLP concept; recommended service-sector application; proposed standalone legislation
Stage 2 — Expansion	J.J. Irani Expert Committee	2005	Extended scope to small enterprises; integrated LLP into broader corporate law reform narrative
Stage 3 — Momentum	Naresh Chandra Committee II	July 2005	Built inter-ministerial consensus; provided final push that led directly to LLP Bill 2006 being introduced in Parliament in December 2006

7.4 Specific Contributions of Naresh Chandra Committee II

While the full report of Naresh Chandra Committee II is less widely cited than Naresh Chandra I or J.J. Irani, its specific contributions included:

Taxation framework outline: The committee provided a preliminary analysis of how LLP taxation should interact with the Income Tax Act — ultimately recommending entity-level taxation (which was adopted).
Foreign LLP provisions: The committee elaborated on the need for a regulatory framework for foreign LLPs operating in India, particularly in the context of WTO General Agreement on Trade in Services (GATS) commitments.
Conversion mechanisms: The committee recommended comprehensive conversion schedules to allow existing firms and companies to convert into LLPs without disruption to their business or contractual relationships — directly resulting in the four Schedules of the LLP Act.
Designated partner residency requirement: The committee specifically recommended that at least one designated partner must be a resident of India, for regulatory and accountability purposes — adopted in Section 7(1) of the LLP Act.

7.5 Legacy: The Bill That Was Born from Three Committees

The LLP Bill 2006 — introduced in the Rajya Sabha on December 15, 2006 — was the direct product of all three committees' work. Crucially, it was the Naresh Chandra Committee II's July 2005 report that completed the policy case and enabled the Ministry of Corporate Affairs to obtain Cabinet approval to proceed with drafting the Bill. Without this final institutional push, the J.J. Irani recommendations might have remained aspirational for several more years.

✔ PRACTICAL NOTE: The LLP Act's Section 7(1) requirement that at least one designated partner be a "resident in India" (defined as staying in India for at least 120 days in the financial year, as amended in 2021) traces directly to the Naresh Chandra Committee II's recommendation. This has practical significance today — a foreign promoter setting up an Indian LLP must ensure one of the two designated partners maintains Indian residency, affecting their travel and stay planning.

⚖ Union of India v. Azadi Bachao Andolan (2003) 263 ITR 706 (SC)

Held: Though not directly about LLP, this case was decided in the same year as the Naresh Chandra I report and addressed the principle that tax policy should not be used to undermine legitimate business structures. This judicial context reinforced the committee's argument that a tax-viable LLP structure (taxed like a firm, not a company) was necessary for the model to be practically adopted.

Principle: Taxation is not a justification for denying legitimate business structures — a principle that informed how LLP taxation was designed.

📌 EXAM TIP: The two Naresh Chandra committees are frequently confused in examination answers. The distinguishing facts: Committee I (2003) = first recommendation, service sector only. Committee II (July 2005) = policy momentum, broader contributions on taxation and residency, directly led to LLP Bill 2006. In essay answers, mentioning BOTH committees and their distinct roles demonstrates a command of legislative history that most candidates lack.

Quick Revision Summary — Topic 7

Key Point	Core Content
Committee II Year	July 2005 (separate from Committee I, 2003)
Both chaired by	Naresh Chandra (former Cabinet Secretary)
Why needed	J.J. Irani's LLP work was secondary to Company Law; inter-ministerial consensus needed; taxation and residency issues unresolved
Specific Contribution	Taxation outline (entity-level); foreign LLP provisions; conversion schedules; designated partner residency requirement
Critical Legacy	Provided final Cabinet-approval push; led directly to LLP Bill 2006 being introduced in Parliament
Three-Stage Process	NC-I (2003) → Irani (2005) → NC-II (July 2005) → Bill 2006 → Act 2008/2009