Tax implications on transfer on share holding
This query is : Resolved
10 December 2010
there is a firm having 2 partners engaged in a hotel business.
They wants to discontinue the same.
They have 2 options :
Either sale the land which they have acquired for hotel business
Or Transfer their respective holdings to other 2 persons...
In my opine, in 1st case Capital gain tax liability will attracted..
I am confused regarding the tax treatment on second one...
Please helpp...
They wants to discontinue the same.
They have 2 options :
Either sale the land which they have acquired for hotel business
Or Transfer their respective holdings to other 2 persons...
In my opine, in 1st case Capital gain tax liability will attracted..
I am confused regarding the tax treatment on second one...
Please helpp...
10 December 2010
in second case also attract capital gain because it is not mandatory that capital gain will arise only on selling of the capital goods , what treatment will be when you will transfer the capital asset ?
10 December 2010
Actually sir, when partners sale theor holdings, it can be treated as sale of business...then in such case would capital gains will be attraected....
11 December 2010
As far i think difference between net worth and sales consideration will attract tax as under the head capital gain.
As far i think difference between net worth and sales consideration will attract tax as under the head capital gain.
11 December 2010
Thanx for ur kind guidance, can we find another way out....
26 July 2025
Great question! Here’s a detailed explanation of the **tax implications on transfer of shareholding in a partnership firm**, especially in your hotel business scenario:
---
### Scenario Summary:
* Firm with 2 partners engaged in hotel business.
* They want to **discontinue**.
* Two options considered:
1. Sell the **land** owned by firm.
2. Transfer their **partnership shares/holdings** to other persons.
---
### 1. **Sale of Land by Firm:**
* When the firm sells land, it’s considered sale of a **capital asset** by the firm.
* **Capital Gains Tax** applies on the difference between sale price and cost of acquisition.
* Tax paid by the firm.
* On dissolution, partners get their share of remaining assets.
---
### 2. **Transfer of Partnership Interest (Shareholding) to Others:**
* When partners transfer their **partnership interest** (their shares/rights in the firm) to others, the tax treatment is different:
#### Taxability:
* Transfer of partnership interest is considered a **transfer of capital asset** by the partner.
* The **capital gains tax** arises in the hands of the **partner transferring their interest**.
* The gain = Difference between **sale consideration received** for the partnership interest and the **cost of acquisition** of that interest (usually the amount invested by the partner).
#### Important Points:
* The buyer gets the **rights in the firm**, including assets and liabilities.
* The firm itself is not dissolved in this case (unless partners also decide to dissolve).
* Capital gains tax liability arises only for the partner **selling/transferring** their share.
---
### Additional Considerations:
* If the transfer price is significantly higher than the book value, the excess is taxable as capital gains.
* The nature of capital gain (short-term or long-term) depends on the holding period of the partnership interest by the selling partner.
* Capital gains on transfer of partnership interest is generally taxable under **Capital Gains** head.
* Stamp duty may also be applicable on the transfer deed of partnership interest.
---
### Can there be a better way?
* Partners sometimes consider **restructuring** or **buy-back** arrangements, but these can be complex and may have tax implications.
* Consulting a tax professional is advisable to explore options like slump sale or other restructuring routes.
---
### Summary:
| Action | Tax Implication |
| ------------------------------ | ----------------------------------------- |
| Sale of land by firm | Capital Gains tax on firm on sale of land |
| Transfer of partner’s interest | Capital Gains tax on partner transferring |
---
**In essence**, yes, capital gains tax will likely arise in both cases — just that in case 2, it’s in the hands of partners transferring their interest, not the firm.
---
If you want, I can help draft sample computations or journal entries for either option!
---
### Scenario Summary:
* Firm with 2 partners engaged in hotel business.
* They want to **discontinue**.
* Two options considered:
1. Sell the **land** owned by firm.
2. Transfer their **partnership shares/holdings** to other persons.
---
### 1. **Sale of Land by Firm:**
* When the firm sells land, it’s considered sale of a **capital asset** by the firm.
* **Capital Gains Tax** applies on the difference between sale price and cost of acquisition.
* Tax paid by the firm.
* On dissolution, partners get their share of remaining assets.
---
### 2. **Transfer of Partnership Interest (Shareholding) to Others:**
* When partners transfer their **partnership interest** (their shares/rights in the firm) to others, the tax treatment is different:
#### Taxability:
* Transfer of partnership interest is considered a **transfer of capital asset** by the partner.
* The **capital gains tax** arises in the hands of the **partner transferring their interest**.
* The gain = Difference between **sale consideration received** for the partnership interest and the **cost of acquisition** of that interest (usually the amount invested by the partner).
#### Important Points:
* The buyer gets the **rights in the firm**, including assets and liabilities.
* The firm itself is not dissolved in this case (unless partners also decide to dissolve).
* Capital gains tax liability arises only for the partner **selling/transferring** their share.
---
### Additional Considerations:
* If the transfer price is significantly higher than the book value, the excess is taxable as capital gains.
* The nature of capital gain (short-term or long-term) depends on the holding period of the partnership interest by the selling partner.
* Capital gains on transfer of partnership interest is generally taxable under **Capital Gains** head.
* Stamp duty may also be applicable on the transfer deed of partnership interest.
---
### Can there be a better way?
* Partners sometimes consider **restructuring** or **buy-back** arrangements, but these can be complex and may have tax implications.
* Consulting a tax professional is advisable to explore options like slump sale or other restructuring routes.
---
### Summary:
| Action | Tax Implication |
| ------------------------------ | ----------------------------------------- |
| Sale of land by firm | Capital Gains tax on firm on sale of land |
| Transfer of partner’s interest | Capital Gains tax on partner transferring |
---
**In essence**, yes, capital gains tax will likely arise in both cases — just that in case 2, it’s in the hands of partners transferring their interest, not the firm.
---
If you want, I can help draft sample computations or journal entries for either option!
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