Capital gain

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Prashanth (Querist)
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25 June 2010 Whether firm is liable to pay capital gain tax on distribution of any capital asset to a partner on his retirment/death?if yes,why it has to pay?

Aditya Maheshwari

Aditya Maheshwari (Expert)
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25 June 2010 As per section 45(4) (4) 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 otherwise89, 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.]

Section 45(4) also covers cases of subsisting partners transferring assets in favour of retiring partners - The word ‘otherwise’ used in section 45(4) takes into its sweep not only the cases of dissolution but also the cases of subsisting partners of a partnership, transferring assets in favour of a retiring partner - CIT v. A.N. Naik Associates [2004] 136 Taxman 107 (Bom.).

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Prashanth

Prashanth (Querist)
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25 June 2010 In PCC study material it is mentioned that as per sec 45(4)the firm is liable to pay capital gain tax on transfer of capital assets only in case of dissoultion,Now my question is whether dissolution incudes reconstitution of firm or not?

Aditya Maheshwari

Aditya Maheshwari (Expert)
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25 June 2010 The section also contains the word or otherwise and hence taxable u/s 45(4).

Prashanth

Prashanth (Querist)
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25 June 2010 But in paduka material there is a case study regarding this question in that it is said that,firm is liable to pay tax only when such capital asset subsequently transferred by the retired partner.Is this correct sir?

Aditya Maheshwari

Aditya Maheshwari (Expert)
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25 June 2010 No it is taxable if it is transferred from firm to partner

Prashanth

Prashanth (Querist)
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25 June 2010 rply me

Aditya Maheshwari

Aditya Maheshwari (Expert)
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25 June 2010 already replied

Prashanth

Prashanth (Querist)
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25 June 2010 Any cash received by a partner on his retirement by selling of his share in profit to the firm is that taxable?