Capital gains

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

27 January 2018 Three individuals want to develop and sell their ancestral land. They formed a partnership firm and transferred their land to the firm. After incurring development expenses they sell the land. The firm pays the taxes on the profits earned. Are the partners exempt from the capital gains on the land transferred to the firm? Is the firm liable to pay capital gains tax or should it treat the profits as income from business? Can ths ecperts explain the provisions of income tax in this issue?

Z (Expert)
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29 January 2018 The capital gain will arise to the partners when they will transfer the property to the firm.
(3) The profits or gains arising from the transfer of a capital asset by a person to a firm or other association of persons or body of individuals (not being a company or a co-operative society) in which he is or becomes a partner or member, by way of capital contribution or otherwise, shall be chargeable to tax as his income of the previous year in which such transfer takes place and, for the purposes of section 48, the amount recorded in the books of account of the firm, association or body as the value of the capital asset shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.
S.50C shall also be applicable.

When the land will be developed and transferred then the partnership firm would be liable to pay the capital gain, unless the firm engages itself in the business of developing the land and transferring the superstructure, in which case provisions of PGBP shall apply.

The profit/gain earned by the firm would not be considered while computing the income of the partners by virtue of S.10(2A)
10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included—
(2A) in the case of a person being a partner of a firm which is separately assessed as such, his share in the total income of the firm.

Explanation.—For the purposes of this clause, the share of a partner in the total income of a firm separately assessed as such shall, notwithstanding anything contained in any other law, be an amount which bears to the total income of the firm the same proportion as the amount of his share in the profits of the firm in accordance with the partnership deed bears to such profits ;

Querist : Anonymous

Querist : Anonymous (Querist)

31 January 2018 Dear sir, thank you for your kind advice. can the partnership treat the cost of the land as NIL and pay the taxes when the sites are sold.The project is only for sale of ancestral land. No buildings will be constructed.

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Z (Expert)
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31 January 2018 Before I could give the advise which you require, I must understand your clear intentions. I can give you answer to the question you asked, but it won't be an advise unless I know the objectives.

What is it that you are trying to achieve?
Why do you want to create a partnership?
There purports to be a conflict in your statements. First you mentioned that "After incurring development expenses they sell the land." Thereafter you mentioned that "The project is only for sale of ancestral land. No buildings will be constructed."

can the partnership treat the cost of the land as NIL and pay the taxes when the sites are sold
Why would you like that? It is inviting extremely large amount of tax. Further, the computation won't be as per the spirit of the provisions of the chapter of capital gain.
In short, not recommended.