Transfer of asset under 45(4) to partners

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.

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.

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)

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

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.

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.

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

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

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.