Dissolution of Partnership Firm

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Abhishek (Querist)
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21 November 2010 If A & B are partners sharing profits in the ratio 1:1. They start there partnership firm with capital of Rs.250000/- each by both. They continue there business for more than 3 years. Thereafter there are some disputes occurred between them & they want to dissolve the firm. In the dissolution process, All assets & liabilities are dissolved, & the amount of Rs.200000/-(each) is transferred to both. So the amount received by them is chargeable as income of Partnership firm or Income from other sources or Capital Gain? Would our answer differs if they got Rs.300000/- in the process of dissolution? would our answer differs if they got Rs.300000/- in the dissolution & they dissolve there business after continuation for 2 years only?

CA PARAS BAFNA

CA PARAS BAFNA (Expert)
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21 November 2010 Mr Abhishek,

The firm had carried out certain business for more than 3 years. As you have told that the firm has carried out the dissolution process. By carrying out dissolution process we understand that the firm has sold away all its fixed assets and current assets, if there be any, and it met the current as well as non current liabilities.
The firm has to prepare a Profit & loss A/c
from 1.4.2010 to till Dissolution Date.
The profit or loss shall be distributed between the partners. The firm will pay tax upon the profits remaining after providing interest and remuneration to partners as usual.
So, the Income will be of the Partnership Firm only.
Now, there be different kinds of income say, business income, capital gains, income from other sources etc to the firm. But the same will be assessed in the firm's hand.
As far as question of the duration of partnership is concerned, it will also be
seen in the context of firm's assets only.
It will not make any difference for the partners.
Further,You are welcome to get answer on the basis of facts.

Abhishek

Abhishek (Querist)
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21 November 2010 Sir, as per ur answer firm will b taxed for the profits till dissolution. and the profit distributed between partners will not be taxed in the hands of Partners. As per sec 10(2A) profit from partnership firm is exempt in the hands of partners. So they won't b taxed. only remuneration if paid then that will b taxed in the hands of partners.
I got that much from ur answer. If wrong, Reply.
But after dissolution whatever cash/bank balance remains & distributed to the partners is tax free or it is amount recd after paying taxes frm firm so it is taxfree? plese explain this?

CA PARAS BAFNA

CA PARAS BAFNA (Expert)
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22 November 2010 You have got my points correctly.
Firm Tax payment may be a matter of mutual understanding between the partners.

As such amount received will be tax free.

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