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Capital gains-partners

Lakshmi Muralidharan (Student) (119 Points)

06 January 2015

A & B are partners in a firm M/s AB & Co. A buys trucks in his name and sells it to firm at a higher price. In that case, the partner pays capital gain and the firm claims depreciation for the said trucks in the same year, is this treatment valid in law?

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(Guest)

The treatment is valid

As per section 32 of Income Tax Act, 1961, an assessee is entitled to claim depreciation on fixed assets only if the following conditions are satisfied:

1. Assessee must be owner of the asset – registered owner need not be necessary.

2. The asset must be used for the purposes of business or profession.

3. The asset must be used during the previous year. The use of the asset during the previous year may be active use or passive [ie., kept ready for use].

The assessment of the firm has nothing to do with the assessment of the partner.

If all the conditions are satisfied, depreciation is allowed.

1 Like

Mihir (Wealth Manager) (5293 Points)
Replied 06 January 2015

When the partner sells the trucks to the firm, the firm becomes the owner and may claim depreciation.

Z ( ) (2960 Points)
Replied 06 January 2015

Well theoritically , truck is not a capital asset to begin with, so there shall be no cap gain

S.2(14) Capital asset does not include

PERSONAL EFFECT i.e movable property

This income is a capital receipt not liable to tax at all.

On second hand the firm can claim higher depreciation

I'd like to see what happens in this case

I can't apply 40A(2) either(Capital expenditure) , neither any explanation to S. 43(1) (as the seller did not used it for business)

[When we were students, our tax teacher told us that such a thing will never happen, the claim of assessee will not be admitted. Why will the department allow buying something from related party at cost higher than in market, the situation is totally theoritical]

Bonafidely it can't be [unless you are some superstar selling your vehicle and buyer is huge fan]