If in a firm, one partner whose closing capital is 5 lakhs is retiring by taking 50 lakhs..wat will be the treatment of 45 lakhs in taxation in firms book as well as partners book..advise
14 November 2009
The issue is not an easy one to answer. First we will see whether Sec56 would apply. There liability is attracted when an individual receives any sum of money from any other person without consideration. Hence there is a chance that the dept may take the view that the retiring partner has received sums without consideration. But while the gift tax was in operation the courts have taken the view that there is no gift tax .The Supreme Court has held in CGT v. T. M. Louiz [2000] 245 ITR 831 that no element of gift is involved when a partner retires from a firm. The fact that on such retirement new partners have been inducted will not in any way alter the legal principles laid down by the Supreme Court in Louiz’s case [2000] 245 ITR 831.
One will have to consider the implications of Sec45(4) of the Act and especially the use of the word"otherwise". Though the courts have held that there is no transfer giving rise to capital gains the impact of Sec45(4) appears to be not free from doubt. siva208@yahoo.com
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