Taxability in hands of Individual
This query is : Resolved
05 April 2009
Hi,
My query is:
X (HUF)carries on business of selling gold. X (HUF) is a senior citizen. He now wants to transfer the whole business to his sons Mr Y and Mr Z. X (HUF) will be fully dissolved after the assets are transferred. Mr Y and Mr Z wants to carry the same business of selling gold with the help of assets transferred from X (HUF). Mr Y and Mr Z are carrying on business in a individual capacity ie sole proprietorship. please note that the stock held here is GOLD.
Can someone help in knowig the tax implications of transferring business from HUF to Individual. Also ways to mitigate tax, if any or other implications. Your reply would be of great help. Thanks
My query is:
X (HUF)carries on business of selling gold. X (HUF) is a senior citizen. He now wants to transfer the whole business to his sons Mr Y and Mr Z. X (HUF) will be fully dissolved after the assets are transferred. Mr Y and Mr Z wants to carry the same business of selling gold with the help of assets transferred from X (HUF). Mr Y and Mr Z are carrying on business in a individual capacity ie sole proprietorship. please note that the stock held here is GOLD.
Can someone help in knowig the tax implications of transferring business from HUF to Individual. Also ways to mitigate tax, if any or other implications. Your reply would be of great help. Thanks
06 April 2009
If you directly transfer the business to individuals you may land up in capital gain tax problems.
since already each individual is having sole proprietorship firm and huf is also carrying gold business please follow the follwing steps.
Sell the stock of gold to individuals.
Then Debtors will appear.
Then dismatile huf. Transfer each share to individual. Then tranfer the debtor to the share of individual.
Remaining if any it should be tranferred by way of bank or cash payaments.
If properties are there then you have to make partition deed and then based on that the properties has to be transferred.
since already each individual is having sole proprietorship firm and huf is also carrying gold business please follow the follwing steps.
Sell the stock of gold to individuals.
Then Debtors will appear.
Then dismatile huf. Transfer each share to individual. Then tranfer the debtor to the share of individual.
Remaining if any it should be tranferred by way of bank or cash payaments.
If properties are there then you have to make partition deed and then based on that the properties has to be transferred.
11 April 2009
Hi srinivasulu, thanks for your reply. HOwever correct me if i am wrong. The business of X(HUF) is of selling gold. So gold here is stock in trade. As per Sec 2(14), capital assets excludes stock in trade held for purpose of business. So i think charging sec 45 fails as there is no capital asset and capital gains should not arise on transfer.
Can u please explain the process of transfer of each share to individual and transfer of debtor to individual. How will this work.
Thanks in advance
Can u please explain the process of transfer of each share to individual and transfer of debtor to individual. How will this work.
Thanks in advance
26 July 2025
Great question! Let me clarify the taxability and the process of transferring a gold business (where gold is stock-in-trade) from an HUF to individual proprietors.
---
### 1. **Taxability on Transfer of Stock-in-Trade (Gold) by HUF to Sons**
* **Stock-in-trade is NOT a capital asset** under Section 2(14) of the Income Tax Act.
* So, **transfer of stock-in-trade does not attract Capital Gains tax** under Section 45.
* When the HUF transfers gold stock to Mr. Y and Mr. Z, **it will be considered a transfer of business assets, not capital assets**.
* However, if the transfer is treated as a **sale**, the income from the sale will be treated as **business income** in the hands of the HUF.
* If the transfer is by way of **partition or dissolution**, then the tax implications depend on whether the transfer is considered a "transfer" under Section 2(47).
---
### 2. **How to Transfer Business Assets from HUF to Sons**
* **Step 1: Transfer of Stock-in-Trade (Gold)**
The HUF can transfer the gold stock to the sons by:
* **Sale at fair market value** (preferred to avoid disputes). This creates a business income for HUF but transfers clear ownership.
* Or by **partition/dissolution**, which may not create capital gains if done properly.
* **Step 2: Transfer of Debtors**
Debtors (receivables) are part of business assets. Transfer these by:
* Assigning the debtor accounts in the books of the sons.
* Alternatively, the sons can "buy" the debtors from HUF at book value or fair value.
* **Step 3: Transfer of Other Assets or Cash**
Any remaining cash or bank balances should be divided and transferred accordingly.
* **Step 4: Dissolution of HUF**
After all assets and liabilities are transferred, the HUF can be dissolved with a proper **partition deed** detailing the transfer of assets to Mr. Y and Mr. Z.
---
### 3. **Tax Implications on Transfer**
* **No capital gains on stock-in-trade** since it's not capital assets.
* Any **profits on sale of stock-in-trade by HUF to sons will be treated as business income** of HUF.
* Transfer of **debts** may also attract business income implications.
* Partition and dissolution of HUF are generally **not taxable events**, but proper documentation is key.
---
### 4. **Mitigating Tax**
* Ensure transfers are at **fair market value** to avoid disputes with tax authorities.
* Use **partition deed** to formalize dissolution.
* Sons start fresh proprietorship with clear ownership of assets.
* Maintain proper records to avoid any allegations of tax evasion.
---
### Summary:
| Asset Type | Taxability on Transfer by HUF to Sons |
| --------------------- | --------------------------------------------------------- |
| Stock-in-trade (Gold) | No capital gains; sale treated as business income if sold |
| Debtors | Business income to HUF if sold or transferred |
| Other Assets | Depends on asset type; may attract capital gains |
| Partition/Dissolution | Generally not taxable if properly documented |
---
If you want, I can help draft a checklist or partition deed template to guide you through this transfer! Would you like that?
---
### 1. **Taxability on Transfer of Stock-in-Trade (Gold) by HUF to Sons**
* **Stock-in-trade is NOT a capital asset** under Section 2(14) of the Income Tax Act.
* So, **transfer of stock-in-trade does not attract Capital Gains tax** under Section 45.
* When the HUF transfers gold stock to Mr. Y and Mr. Z, **it will be considered a transfer of business assets, not capital assets**.
* However, if the transfer is treated as a **sale**, the income from the sale will be treated as **business income** in the hands of the HUF.
* If the transfer is by way of **partition or dissolution**, then the tax implications depend on whether the transfer is considered a "transfer" under Section 2(47).
---
### 2. **How to Transfer Business Assets from HUF to Sons**
* **Step 1: Transfer of Stock-in-Trade (Gold)**
The HUF can transfer the gold stock to the sons by:
* **Sale at fair market value** (preferred to avoid disputes). This creates a business income for HUF but transfers clear ownership.
* Or by **partition/dissolution**, which may not create capital gains if done properly.
* **Step 2: Transfer of Debtors**
Debtors (receivables) are part of business assets. Transfer these by:
* Assigning the debtor accounts in the books of the sons.
* Alternatively, the sons can "buy" the debtors from HUF at book value or fair value.
* **Step 3: Transfer of Other Assets or Cash**
Any remaining cash or bank balances should be divided and transferred accordingly.
* **Step 4: Dissolution of HUF**
After all assets and liabilities are transferred, the HUF can be dissolved with a proper **partition deed** detailing the transfer of assets to Mr. Y and Mr. Z.
---
### 3. **Tax Implications on Transfer**
* **No capital gains on stock-in-trade** since it's not capital assets.
* Any **profits on sale of stock-in-trade by HUF to sons will be treated as business income** of HUF.
* Transfer of **debts** may also attract business income implications.
* Partition and dissolution of HUF are generally **not taxable events**, but proper documentation is key.
---
### 4. **Mitigating Tax**
* Ensure transfers are at **fair market value** to avoid disputes with tax authorities.
* Use **partition deed** to formalize dissolution.
* Sons start fresh proprietorship with clear ownership of assets.
* Maintain proper records to avoid any allegations of tax evasion.
---
### Summary:
| Asset Type | Taxability on Transfer by HUF to Sons |
| --------------------- | --------------------------------------------------------- |
| Stock-in-trade (Gold) | No capital gains; sale treated as business income if sold |
| Debtors | Business income to HUF if sold or transferred |
| Other Assets | Depends on asset type; may attract capital gains |
| Partition/Dissolution | Generally not taxable if properly documented |
---
If you want, I can help draft a checklist or partition deed template to guide you through this transfer! Would you like that?
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