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Transfer of asset under 45(4) to partners

vinodk.Nesar (AUDIT) (100 Points)

10 February 2009

Dear all,

When a firm gets dissolved and transfers assets to partners, it attracts Sec45(4).
But, if not at the time of dissolution it transfers the asset in return for capital contribution will it attract capital gain ? and what rate to be adopted during such transaction, wheather Market Value or Book Value of the firm ?

Thanks in advance
Regards
Vinod

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9 Replies

CA Jithesh C (Chartered Accountant) (253 Points)
Replied 10 February 2009

Sec 45(4) is applicable for the distribution of capital asset made even during the existence of partnership. Fair market value on the date of transfer is applicable.

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CA. Ashok shah (CHARTERED ACCOUNTANT) (333 Points)
Replied 10 February 2009

There are two conditions to be fulfilled so as to attract liability of capital gain u/s 45(4). The conditions are as under:

1) There should be dissolution of firm, AOP or BOI not being a company or a co op society and

2) There should be distribution of capital assets on such dissolution.

For the purpose of computing capital gain, the fair market value of the capital assets on the date of distribution is taken as full value of consideration.

Abhinav Agarwal (M.Com C.A SAP Consultant) (814 Points)
Replied 10 February 2009

During the existance of partnership, this transaction will be treated as normal sale of asset. This should be at Book value taking in to consideration the declaration u/s 40 A (ii)

CA Jithesh C (Chartered Accountant) (253 Points)
Replied 10 February 2009

Dissolution of the firm is not compulsory. Act says "dissolution or otherwise".

CA. Ashok shah (CHARTERED ACCOUNTANT) (333 Points)
Replied 10 February 2009

Yes. The Bombay High Court (2004) 265 ITR 346 in case of CIT Vs. A N Naik Associates has held that the word “otherwise” as appearing in the Sec 45(4) not only includes case of dissolution but also takes into its sweep case of retirement of partners even though there is no dissolution and business is continuing one. With due due respect, this may not be the intention of legislature.

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CA. Ashok shah (CHARTERED ACCOUNTANT) (333 Points)
Replied 10 February 2009

Mr. Abhinav, there is no such Sec. 40 (a) (ii) for levying capital gain tax. If you are talking about Sec.40A(2), than it is for disallowance of business expenditure where payment is made to specified persons i.e. relative which is excessive or not reasonable. Sec. 45(4) is for levy of capital gain tax on distribution of capital assets at the time of dissolution of the firm. It is not applicable if distributed asset is not a capital asset.

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Ashish M (Chartered Accountant) (2731 Points)
Replied 10 February 2009

the expression 'otherwise' includes a wide meaning and not only dissolution...........

vinodk.Nesar (AUDIT) (100 Points)
Replied 11 February 2009

Dear all,

Yes i do agree the word transfer or otherwise..

But if it is for the purpose of capital contributed by him if then what will be the consequence ?

thanks and regards

Vinod

CA. Ashok shah (CHARTERED ACCOUNTANT) (333 Points)
Replied 11 February 2009

In case of transfer of capital assets by partner to firm, provisions of Sec.45 (3) are applicable.

Accordingly, value as recorded in the books of the firm for such transferred capital assets, shall be taken as full value of consideration for capital gain purpose.