Taxability in the hands of the Partner
This query is : Open
12 July 2011
Facts of the case\;
1. Partner A is retiring from a Partnership firm XYZ & Co.
2. The balance in his capital account, as on date of retirement is Rs.2,50,000/-.
3. One of the continuing partner purchases his share of investment, in the partnership firm, for Rs.4,50,000/-, by paying this amount to Partner A.
4. What will be the tax implication for the additional amount of Rs.2,00,000/- received by Mr.A?
5. How does the continuing partner, who purhased Mr.A's share, account this in his books of accounts?
1. Partner A is retiring from a Partnership firm XYZ & Co.
2. The balance in his capital account, as on date of retirement is Rs.2,50,000/-.
3. One of the continuing partner purchases his share of investment, in the partnership firm, for Rs.4,50,000/-, by paying this amount to Partner A.
4. What will be the tax implication for the additional amount of Rs.2,00,000/- received by Mr.A?
5. How does the continuing partner, who purhased Mr.A's share, account this in his books of accounts?
12 July 2011
Share in the partnership is a right to share profits with an obligation to share the losses also.
*
If the right is a capital asset then something must be paid on a date or dates by Mr A while acquiring the right because
t he date of acquisition of the asset is a material factor in applying the computation provisions pertaining to capital gains.
*
It is possible to say that the "cost of acquisition" mentioned in section 48 implies a date of acquisition.
*
In my view the amount received by Mr A is
a tax free capital receipt.
*
For the purchasing partner it is an expenditure.
Which can be written off by him through his capital account.
*
If the right is a capital asset then something must be paid on a date or dates by Mr A while acquiring the right because
t he date of acquisition of the asset is a material factor in applying the computation provisions pertaining to capital gains.
*
It is possible to say that the "cost of acquisition" mentioned in section 48 implies a date of acquisition.
*
In my view the amount received by Mr A is
a tax free capital receipt.
*
For the purchasing partner it is an expenditure.
Which can be written off by him through his capital account.
13 July 2011
It is very simple.
First of all any change in the constitution of the Partnership firm is governed by the provisions of Section 45(3) &(4) of the Income Tax Act. The respective provisions are re-produced below:
[(3) The profits or gains arising from the transfer of a capital asset by a person to a firm or other association of persons or body of individuals (not being a company or a co-operative society) in which he is or becomes a partner or member, by way of capital contribution or otherwise, shall be chargeable to tax as his income of the previous year in which such transfer takes place and, for the purposes of section 48, the amount recorded in the books of account of the firm, association or body as the value of the capital asset shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.
(4) The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co-operative society) or otherwise 90 , shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place and, for the purposes of section 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer.]
First of all any change in the constitution of the Partnership firm is governed by the provisions of Section 45(3) &(4) of the Income Tax Act. The respective provisions are re-produced below:
[(3) The profits or gains arising from the transfer of a capital asset by a person to a firm or other association of persons or body of individuals (not being a company or a co-operative society) in which he is or becomes a partner or member, by way of capital contribution or otherwise, shall be chargeable to tax as his income of the previous year in which such transfer takes place and, for the purposes of section 48, the amount recorded in the books of account of the firm, association or body as the value of the capital asset shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.
(4) The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co-operative society) or otherwise 90 , shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place and, for the purposes of section 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer.]
13 July 2011
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