S. 45(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, 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.
In CIT V. A.N. Naik Associates (Bom.)
It was held that the word otherwise will cover situation where partner retires from the firm and assets are distributed to him
So I am merging your cases now
In CIT V. R. Lingmallu Raghukumar (S.C) , it was held that Excess amount received by the assessee on retirement from the firm is not assessable to capital gain, the share of the partner in the firm is not transferrable and hence there can be no transfer
There is another judgement of M/S Dynamic Enterprises Karnataka HC , helding that there shall be no cap gain
There is another judgement of Riyaz A. Sheikh Bombay HC 2013, in this case AO argued that the sum has been received for relinquishing the rights in the firm. The court held that this is a CAPITAL RECEIPT not liable to cap gain
[Note that the judgement says that there will be no cap gain in hands of partner, but can this be covered under any other head?]
Profit and Gains from business and Profession
In case of Prashant S. Joshi it was held that such sum can be included in income u/h PGBP as S. 28 does not cover the money received at the time of retirement
Income from other sources
Refer to the aforesaid judgement of Riyaz A. Sheikh
in that judgement the court held that this sum is a capital receipt
[Capital receipt can not be taxed unless there is specific provision for it in law (you can find this in many Supreme Court judgements and this one is not covered so if we follow this judgement (Riyaz A, Sheikh) then there is no tax on this excess]
In some cases people have tried to bring it to tax via application of S. 56(2)(vii) {I am in favour of this view]
But some says that if we do so then there will be double taxation
(This calculation also answers your querry)
Suppose X has 10L as balance in capital A/C in firm
This balance is offsetted by giving her Jewellery having FMV of 50 L , but Cost of acquisition being 5L to the firm
Cap gain to firm [S. 45(4)]
Full value consideration >>>>>>>>> 50 L
Indexed Cost of Acquisition >>>>>> 15 L
Cap gain >>>>>>>>>>>>>>>>>>>> 35 L
Now to the partner, she sold this jewellery for 55L
Full value consideration >>>>>>>>>> 55L
Cost of acquisition [S.49(4)] >>>>>>>50L
STCG (presumed) >>>>>>>>>>>>>>5 L
Income from other sources u/s 56(2)(vii)
[50L (FMV) - 10L (Balance in capital A/C) >>> 40 L
So there is double taxation On transfer of jewellery worth Rs. 50L, govt. has treated Rs. 35 L as cap gain from firm and 40L as income from other source [Which in itself is more than 50 L]
I'd rather say that there is taxation on 2 people, assesee and partners since they aredifferent person so there should be tax on both. But however the tax amount has cascade effect
Instead of subtracting 10L , it would have been better if 35L is taxed . But this is the law @ the moment
I think all your cases are covered, if anything is left then please post it
NOTE
DO NOT DO
X A/C DR. 10L
TO JEWELLERY 4L
TO P&L 6L
ITS WRONG AND IF AO IS NOT SATISFIED THEN HE WILL INITITATE PENALTY FOR CONCEALMENT OF INCOME
NOTE FURTHER THAT 56(2)(VII) WILL NOT BE ATTRACTED IN CASE OF NON DEPRECIABLE ASSET OR OTHER ASSET WHICH ARE NOT "PROPERTY" AS PER S.56(2)(VII)
ALSO NOTE THAT IF THE ASSETS ARE TRANSFERRED AT FAIR MARKET VALUE THEN TAX CAN BE REDUCED
CAP GAIN TO FIRM WILL BE SAME BUT COST OF ACQUISITION WILL BE FAIR MARKET VALUE, BUT INCOME FROM OTHER SOURCE WILL BE NIL IN HANDS OF PARTNER
CAclubindia
