Capital Gain or Business Income?

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Querist : Anonymous

Querist : Anonymous (Querist)

17 February 2011 Four Individuals has decided to form a partnership firm in the name of ABC with equal share of 25% each. Three (3) partners are bringing the capital in cash and final partner i.e (4th) is bringing his own Land consisting of 5 acrs as his capital in to the firm.
The Partnership firm has been formed and all have decided to develop the 5 acrs of land belonging to 4th Partner in to layouts and divided it in to plots as 150 sqyrds, 200 sqyrds, 300 sqyrds, etc and sell them. The original cost of the land is 2.5 crs and the amount recorded in the books of account of the firm ABC as capital at Rs.10.00 Crs. This is equal to the stamp and registers record value.
NOW MY QUESTION IS:
1. Is there any Capital Gain arising on account of contribution of Land in to the Partnership firm as capital.
2. If Taxable as Capital Gain, what would be the date of transfer.
3. Whether the enhanced amount (which is equal to the stamp and registers value), the difference amount between 10crs -2.5crs, can be treated as Business Income for the Individual Partner? (i.e 4th Partner)
I would appreciate if the answer is backed by any legal decisions in this regard.
Regards

CA PARAS BAFNA

CA PARAS BAFNA (Expert)
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17 February 2011 1. Is there any Capital Gain arising on account of contribution of Land in to the Partnership firm as capital.

Yes. Capital Gain will arise to the partner contributing land to the firm and the amount credited to the partner in the books of firm
will be the sales consideration.

CA PARAS BAFNA

CA PARAS BAFNA (Expert)
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17 February 2011 2. If Taxable as Capital Gain, what would be the date of transfer.

Ans: The date of transfer is the date on which amount is credited to the partner's capital account.

CA PARAS BAFNA

CA PARAS BAFNA (Expert)
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17 February 2011 . Whether the enhanced amount (which is equal to the stamp and registers value), the difference amount between 10crs -2.5crs, can be treated as Business Income for the Individual Partner? (i.e 4th Partner)

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Ans. In the given situation it can not be treated as business income of all the partners as the entire amount has to be credited to that partner, who is contributing land.

Querist : Anonymous

Querist : Anonymous (Querist)

18 February 2011 Thanks for your immediate response. I think this will help me.

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