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As you are aware that people are utilizing Partnership Model to evade tax payment on transfer of properties. The trick used till date was holding Real Estate Assets in the name of Partnership Firm, revaluing the assets to current market price, bringing the new partners, who will infuse cash in the firm, then old partners withdraw funds come into their Capital Accounts on the basis of valuation of assets to the extent of their shares/profit sharing ratios in the Partnership Firm.

This way partners save payment of Stamp Duty on transfer and Capital Gain Tax as required on transfer of property in normal course of the transaction.

Supreme court puts an end to large tax evasion through partnership firms



The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co- operative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place and, for the purposes of section 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer.


In this case the assessee has argued that amount credited on revaluation to the Capital Accounts of the Partners was only a Notional or book entry. It was also argued that provisions of Section 45(4) dealing with tax on gains of firm or association or body following transfer of Capital Assets would not be applicable in this case unless Partnership Firm dissolves.


The SC rejected above contention of the assessee and has decided in favor of Tax Department on the basis of two words "Or Otherwise”, that were introduced when law was amended in 1987.

The Apex Court in its ruling said "after detailed analysis of Section 45(4), it is observed that the word "OTHERWISE”, used in Section 45(4) takes into its sweep not only in cases of dissolution but also cases of subsisting partners of a partnership, transferring assets in favor of retiring partners.

"In 2021, legislature attempted to plug this loophole and prescribed a formula-based methodology under Section 45(4) of IT Act, 1961 to tax reconstitution events in the hand of Firm. While applying this formula any revaluation-related credits in the partners' account were specifically required to be ignored while ascertaining taxes.”

The SC Ruling goes one step ahead and deems the event of revaluation of assets of partnership firm itself as a taxable event in the hand of partnership firm, holding that a revaluation of partnership assets is deemed a transfer of assets in favor of partners.



Such revaluation surplus would be taxable in the hand of the Partnership Firm and would be subjected to "CAPITAL GAIN TAX”, under provisions of Income Tax Act,1961.

After above decision the old partners (post revaluation of assets) now not allowed to take advantage of the Partnership Entity to evade Capital Gain Tax on insertion of new partners and who brings capital into firm and Old Partners withdrawing capital on the basis of their profit-sharing ratios as credited into their Capital Accounts.

The ruling has profound implications. In real estate deals especially when it comes to transferring of land and development rights, revaluation as an instrument was used to thwart the liability. Revaluation as an instrument of Tax sparing has been in practice for decades.

The Apex Court has brought Curtain Down on such mode of planning to evade tax.


Since this judgement is in favor of Income Tax Department and hence IT has found a tool to open old cases involving such tricks to evade tax by tax by using Partnership Entity. The IT Department in this case may open past cases for re-assessment.



This ruling of SC will have a far-reaching effect, which has changed perception of using Partnership Firm to evade taxes. The SC has considered revaluation of the assets of a Partnership Firm is an event deemed to transfer of assets to the partners and hence taxable in the hand of firm. There is need to curb this loophole in earlier Income Tax provisions. But this will lead to various litigations and opening of old already assessed cases by the IT Department.

DISCLAIMER: The article presented here is only for sharing knowledge with the readers. The views are personal, shall not be considered as professional advice. In case of necessity do consult with tax professionals.


Published by

FCS Deepak Pratap Singh
(Manager Compliance -SBI General Insurance Co. Ltd.)
Category Income Tax   Report

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