09 February 2021
Transfer of property between firm and partners – taxation aspect (sec 45) Firm distributing immovable assets as well as liabilities to its partners on dissolution.
Two partners have agreed to start and carry out the business of partnership for their mutual benefit. The partnership firm is not registered with registrar of firms.
The business of firm is to acquire reservation land & handover it to local Municipal Corporation by due legal process & obtain TDR/FSI/Development Right Certificate.
Partnership firm purchased a litigation (reservation) land in 2018 & recorded it in Books of accounts along with liability on acquisition. The TDR work is under process. Now both the partners decide to dissolve the firm and transfer the immovable property in the name of one partner along with liability of the firm.
07 July 2024
In the scenario where a partnership firm dissolves and transfers immovable property along with liabilities to one of the partners, here are the tax implications to consider:
1. **Transfer of Immovable Property**: The transfer of the reservation land from the partnership firm to one of the partners upon dissolution constitutes a transfer under Section 45 of the Income Tax Act, 1961. The partnership firm will be liable to pay capital gains tax on the transfer of this capital asset.
2. **Capital Gains Calculation**: Capital gains are computed as the difference between the full value of consideration received or accruing as a result of the transfer and the indexed cost of acquisition. The indexed cost of acquisition adjusts the original cost of acquisition for inflation using the cost inflation index published by the tax authorities.
3. **Taxation of Capital Gains**: The capital gains arising from the transfer of the property will be taxable in the hands of the partnership firm. If the property has been held for more than 24 months (considered a long-term capital asset), it will attract long-term capital gains tax rates. Long-term capital gains tax rates are generally lower than short-term capital gains tax rates.
4. **Treatment of Liabilities**: When the property and liabilities are transferred to the partner, any liabilities assumed by the partner should be considered. The tax implications related to liabilities need careful consideration, as they may affect the net consideration received by the partnership firm and thereby impact the computation of capital gains.
5. **Tax on Partners**: Upon distribution of the property and liabilities to the partner, the receiving partner will also need to account for the received property at its fair market value as per Section 45(3) of the Income Tax Act. This could potentially trigger capital gains tax for the receiving partner at the time of transfer, depending on the circumstances of the transfer and the applicable tax provisions.
**Compliance Requirements**: Proper documentation of the transfer, including valuation reports, agreements, and any other relevant documents, should be maintained to comply with tax laws and regulations. Stamp duty and registration requirements as per state laws will also apply to the transfer of immovable property.
Given the complexities involved in tax implications related to property transfers, especially upon dissolution of a partnership firm, it is advisable to consult with a qualified tax professional or chartered accountant. They can provide specific guidance based on the exact details of the transaction and ensure compliance with tax laws while optimizing tax efficiency where possible.
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