Procedure for closure of partnership firm under it act
This query is : Resolved
02 August 2016
A partnership firm having three partners which carries construction work. A partnership Firm constructed an apartment. Three residential flats are unsold.
The partners wish to distribute unsold flats amongst themselves (Treatment of capital Gain in case of transfer) and close/ dissolve the firm. What will be the treatment in the hands of firm as well as partners under Income Tax Act. Also, procedure for closure of partnership firm under IT Act & Other statute i.e. Partnership Act.
Please guide me
as early as possible
The partners wish to distribute unsold flats amongst themselves (Treatment of capital Gain in case of transfer) and close/ dissolve the firm. What will be the treatment in the hands of firm as well as partners under Income Tax Act. Also, procedure for closure of partnership firm under IT Act & Other statute i.e. Partnership Act.
Please guide me
as early as possible
03 August 2016
A partnership firm having three partners which carries construction work. Firm constructed an apartment , three residential flats are unsold.
The partners wish to distribute unsold flats amongst themselves ( Treatment of capital gain in case of transfer ) and close/ dissolve the firm. What will be treatment in the hands of firm as well as partners under Income Tax Act. Also, Procedure for closure of partnership firm under IT Act & Other Statute i.e. Partnership Act.
Please guide me
as early as possible
The partners wish to distribute unsold flats amongst themselves ( Treatment of capital gain in case of transfer ) and close/ dissolve the firm. What will be treatment in the hands of firm as well as partners under Income Tax Act. Also, Procedure for closure of partnership firm under IT Act & Other Statute i.e. Partnership Act.
Please guide me
as early as possible
10 August 2024
To close a partnership firm under the Income Tax Act and the Partnership Act, and handle the distribution of unsold assets among partners, you need to follow several steps and adhere to specific tax implications. Here's a comprehensive guide to the procedure and tax treatment:
### **1. Procedure for Closure of Partnership Firm:**
#### **Under the Partnership Act, 1932:**
1. **Dissolution Agreement:**
- **Draft Dissolution Agreement:** Prepare and execute a dissolution agreement among the partners. This agreement should detail the terms of dissolution, including the distribution of assets (unsold flats in this case), liabilities, and any other relevant provisions.
- **Notice of Dissolution:** Notify the Registrar of Firms about the dissolution by filing a notice of dissolution in Form 6 under the Partnership Act.
2. **Settlement of Accounts:**
- **Liquidate Assets:** Convert the assets of the firm (including unsold flats) into cash or distribute them among the partners as per the dissolution agreement.
- **Settle Liabilities:** Ensure all liabilities and obligations of the firm are settled.
3. **File Final Accounts:**
- **Prepare Final Accounts:** Prepare the final accounts of the firm up to the date of dissolution. This should include profit and loss accounts, balance sheet, and the account showing the distribution of assets among partners.
4. **Tax Clearance Certificate:**
- **Obtain No Objection Certificate (NOC):** If necessary, obtain a No Objection Certificate from the Income Tax Department for the dissolution of the firm.
5. **Public Notice:**
- **Publish a Public Notice:** Publish a public notice in a local newspaper about the dissolution of the firm. This is to inform creditors and other interested parties about the dissolution.
#### **Under the Income Tax Act, 1961:**
1. **Filing Final Returns:**
- **File Final Income Tax Return:** File the final income tax return for the firm for the year in which the dissolution occurs. Ensure that the return includes the profit and loss statement up to the date of dissolution and the distribution of assets.
2. **Treatment of Assets and Liabilities:**
- **Transfer of Assets:** The distribution of unsold flats to partners is treated as a transfer of assets. The firm is deemed to have sold the assets at their market value, and any capital gain or loss arising from this transfer should be reported in the firm's final return.
- **Capital Gains Tax:** The capital gain on the transfer of the flats is computed as the difference between the market value of the assets and their book value. This gain is taxable in the hands of the firm.
3. **Distribute Final Settlement:**
- **Final Distribution:** Distribute the remaining assets (including unsold flats) among the partners as per the dissolution agreement. The distribution will be based on the agreed ratio or as specified in the partnership deed.
### **2. Tax Treatment for Partners:**
1. **Capital Gains Tax:**
- **On Distribution of Flats:** When the unsold flats are distributed to the partners, it is treated as a transfer. The partners will be deemed to have received the flats at their market value on the date of distribution.
- **Capital Gains Calculation:** The partners will need to compute capital gains based on the market value of the flats received and the cost of acquisition or book value as reflected in the firm's accounts. This gain will be taxable in the hands of the partners.
2. **Tax Reporting:**
- **Report in Individual Returns:** Each partner should report the capital gains in their individual income tax returns. They should include the value of the flats received and compute the tax on the capital gains accordingly.
3. **Future Sale of Assets:**
- **Cost of Acquisition for Partners:** The market value of the flats at the time of distribution becomes the cost of acquisition for the partners. This will be used to calculate capital gains in the event of a future sale of these flats.
### **Summary of Steps:**
1. **Partnership Act:**
- Execute dissolution agreement.
- Notify Registrar of Firms.
- Settle assets and liabilities.
- File notice of dissolution.
2. **Income Tax Act:**
- File final return for the firm.
- Compute and report capital gains.
- Distribute assets and report capital gains in partners’ individual returns.
**Additional Advice:**
- **Consult a Tax Professional:** Due to the complexity of tax regulations and the need to ensure compliance, it’s advisable to consult with a tax professional or chartered accountant for guidance tailored to your specific situation.
- **Legal Consultation:** If needed, consult with a legal professional to ensure proper compliance with all legal requirements and procedures.
By following these steps, you can efficiently close the partnership firm and manage the tax implications of distributing unsold assets among the partners.
### **1. Procedure for Closure of Partnership Firm:**
#### **Under the Partnership Act, 1932:**
1. **Dissolution Agreement:**
- **Draft Dissolution Agreement:** Prepare and execute a dissolution agreement among the partners. This agreement should detail the terms of dissolution, including the distribution of assets (unsold flats in this case), liabilities, and any other relevant provisions.
- **Notice of Dissolution:** Notify the Registrar of Firms about the dissolution by filing a notice of dissolution in Form 6 under the Partnership Act.
2. **Settlement of Accounts:**
- **Liquidate Assets:** Convert the assets of the firm (including unsold flats) into cash or distribute them among the partners as per the dissolution agreement.
- **Settle Liabilities:** Ensure all liabilities and obligations of the firm are settled.
3. **File Final Accounts:**
- **Prepare Final Accounts:** Prepare the final accounts of the firm up to the date of dissolution. This should include profit and loss accounts, balance sheet, and the account showing the distribution of assets among partners.
4. **Tax Clearance Certificate:**
- **Obtain No Objection Certificate (NOC):** If necessary, obtain a No Objection Certificate from the Income Tax Department for the dissolution of the firm.
5. **Public Notice:**
- **Publish a Public Notice:** Publish a public notice in a local newspaper about the dissolution of the firm. This is to inform creditors and other interested parties about the dissolution.
#### **Under the Income Tax Act, 1961:**
1. **Filing Final Returns:**
- **File Final Income Tax Return:** File the final income tax return for the firm for the year in which the dissolution occurs. Ensure that the return includes the profit and loss statement up to the date of dissolution and the distribution of assets.
2. **Treatment of Assets and Liabilities:**
- **Transfer of Assets:** The distribution of unsold flats to partners is treated as a transfer of assets. The firm is deemed to have sold the assets at their market value, and any capital gain or loss arising from this transfer should be reported in the firm's final return.
- **Capital Gains Tax:** The capital gain on the transfer of the flats is computed as the difference between the market value of the assets and their book value. This gain is taxable in the hands of the firm.
3. **Distribute Final Settlement:**
- **Final Distribution:** Distribute the remaining assets (including unsold flats) among the partners as per the dissolution agreement. The distribution will be based on the agreed ratio or as specified in the partnership deed.
### **2. Tax Treatment for Partners:**
1. **Capital Gains Tax:**
- **On Distribution of Flats:** When the unsold flats are distributed to the partners, it is treated as a transfer. The partners will be deemed to have received the flats at their market value on the date of distribution.
- **Capital Gains Calculation:** The partners will need to compute capital gains based on the market value of the flats received and the cost of acquisition or book value as reflected in the firm's accounts. This gain will be taxable in the hands of the partners.
2. **Tax Reporting:**
- **Report in Individual Returns:** Each partner should report the capital gains in their individual income tax returns. They should include the value of the flats received and compute the tax on the capital gains accordingly.
3. **Future Sale of Assets:**
- **Cost of Acquisition for Partners:** The market value of the flats at the time of distribution becomes the cost of acquisition for the partners. This will be used to calculate capital gains in the event of a future sale of these flats.
### **Summary of Steps:**
1. **Partnership Act:**
- Execute dissolution agreement.
- Notify Registrar of Firms.
- Settle assets and liabilities.
- File notice of dissolution.
2. **Income Tax Act:**
- File final return for the firm.
- Compute and report capital gains.
- Distribute assets and report capital gains in partners’ individual returns.
**Additional Advice:**
- **Consult a Tax Professional:** Due to the complexity of tax regulations and the need to ensure compliance, it’s advisable to consult with a tax professional or chartered accountant for guidance tailored to your specific situation.
- **Legal Consultation:** If needed, consult with a legal professional to ensure proper compliance with all legal requirements and procedures.
By following these steps, you can efficiently close the partnership firm and manage the tax implications of distributing unsold assets among the partners.
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