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Income tax

saurabh (Article) (36 Points)

25 February 2008

What is the tax treatment when one partner of a partnership farm purchase of share of other partner(There is only 2 partner in the firm). whether it is capital gain or income from business and profession.

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7 Replies

CA Hemant T Dewani (Chartered Accountant) (3356 Points)
Replied 25 February 2008

if one partner gives his shares of the firm then there is no income or capital gain but if one partner gives amount in excess of his capital then the excess amount is goodwill and taxable as business income.

saurabh (Article) (79 Points)
Replied 25 February 2008

pls give me the reference from where u make decesion..............

S.Srinivasaraghavan (Chief Financial Officer and Co) (11318 Points)
Replied 25 February 2008

How will he purchase? There are no share scrips like in the case of a company. This will only be a reconstitution of firm. The consideration if any,received by a partner for agreeing to reduce his share, from the other whose share increased, will be towards the extinguishment of rights in the capital assets independent of and otherwise than on account of transfer, and therefore may not pass the full test of capital gains. The case in my opinion will give rise to conflicting litigation. I invite our learned friends views also

saurabh (Article) (79 Points)
Replied 25 February 2008

there is recontitution of firm also because there is only two partner , if one puchase whole share of other then it is a sole propritership.?

S.Srinivasaraghavan (Chief Financial Officer and Co) (11318 Points)
Replied 25 February 2008

Naturally, yes. It becomes a sole proprietorship.

Late CA Sampat Jain (Chartered Accountant) (4772 Points)
Replied 25 February 2008

This is a case of Partner A relinquishing his rights in the partnership in favour of partner B for consideration . So the TRANSFEROR of the rights is A and the transferee is B. The rights of A in partnership is a capital asset. Therefore on such transfer the quetion of capital gains may arise in the hands of A.

S.Srinivasaraghavan (Chief Financial Officer and Co) (11318 Points)
Replied 25 February 2008

yes this is what I had pointed out, but it appears that different courts have on different times ruled that 'transfer' has not taken place. It requires an indepth study.