Capital Gains on Property_Partnership firm

This query is : Resolved

Dipen (Querist)
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14 February 2024 Dear Experts,

One commercial property was purchased by a partnership firm in 2005 consisting of 5 partners.

However in a span of 4 to 5 years , 4 partners retired from the partership due to losses in business and partnership firm was dissolved. Also in land records , the property was transferred to the 5th partner who then continued the business as a proprietory concern. However no compensation was paid to 4 retiring partners due to losses in business as per agreement.

Now if the 5th partner i.e the sole proprietor sells the property what will be the cost of property for purpose of Capital gains? Will it be only his share when the property was originally purchased or entire cost of the property?

Please advice

Regards,

Dipen

Dipen (Querist)
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15 April 2024 Experts , please advice

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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06 July 2024 In the scenario described, the determination of the cost of the property for the purpose of capital gains upon its sale by the 5th partner (now operating as a sole proprietor) depends on several factors related to the legal transfer and ownership of the property over time. Here’s how it typically works:

1. **Original Purchase by Partnership Firm (2005):**
- The commercial property was purchased by the partnership firm consisting of 5 partners in 2005. The cost of acquisition for the property would be based on the proportionate share of each partner in the partnership firm at the time of purchase.

2. **Transfer to 5th Partner (Sole Proprietorship):**
- After the dissolution of the partnership firm, the property was transferred to the 5th partner, who continued the business as a sole proprietorship. This transfer would typically involve a legal process where the property’s ownership was formally transferred to the 5th partner.

3. **Calculation of Cost for Capital Gains:**
- When the 5th partner sells the property as a sole proprietor, the cost of acquisition for the purpose of calculating capital gains would generally be the proportionate share of the property’s cost that was allocated to the 5th partner at the time of the partnership’s dissolution.
- This would typically be based on the terms of the dissolution agreement or any subsequent legal documents that transferred the property to the 5th partner. If the property was legally transferred to the 5th partner without compensation to the other partners, the 5th partner’s cost would likely reflect the original partnership’s cost allocation.

4. **Documentation and Legal Clarifications:**
- It’s crucial to have documentation such as the dissolution agreement, transfer deed, and any other legal documents that specify how the property was transferred to the 5th partner. These documents would clarify the ownership and the basis of cost allocation for the property.
- In cases where the property was transferred without compensation to the other partners, the capital gains would typically be computed based on the original cost allocation to the 5th partner.

To summarize, for the purpose of calculating capital gains when the property is sold by the 5th partner (now sole proprietor), the cost of acquisition would generally be based on the original proportionate share allocated to the 5th partner when the property was transferred to them after the dissolution of the partnership firm. It’s advisable to consult a tax advisor or a chartered accountant for specific guidance tailored to the legal and financial details of this transaction.

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