Section 45(4)

This query is : Resolved

CA.E.Deepan Chakravarthy (Querist)
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22 December 2010 Hello Experts,
I would like to narrate you a diary of events that would help my experts to clarify my queries
1. We had a firm XYZ, which was formed with seven partners, which had both property and business income.
2. The property was purchased in firm name.
3. We expected that the said firm’s rental income would cross ` 10 Lakhs during the year 2008 – 2009.
4. We planned to dissolve the firm and dissolved the firm orally (agreement was not required because all the partners are brothers). We had transferred the assets and liabilities to new firm except the house property.
5. When the firm is dissolved it would attract capital gain under section 45(4), only the assets are distributed. So, we transferred all capital assets (except the property) at fair market value (fortunately it was lesser than book value, because it was very old asset).
6. The same business has been continuing under new firm with new PAN ( fortunately, we got the old firm name too)
7. The property is being continued in the name of the dissolved firm, and income of that property is being assessed in individuals’ (i.e. partners) hand. We took this stand because the firm was dissolved and partners are become co-owners of the property. By virtue of section 26 if the property is owned by two or more persons and their respective shares are definite and ascertainable, then income is assessable in their individuals’ hand.
8. By this, we would escape from service tax liability, (note it is tax planning not evasion) because every individual share would not exceed ` 10Lakhs.
Now my queries are:
• When the firm said to be dissolved, according to my knowledge when the dissolution deed is executed or when the business ceases to exit (Note I am not concerned about other dissolutions). If business is dissolved other than by way of dissolution deed then what is the definition of Business? What would definition of business be applied for partnership firm? Whether general definition would be applied or income-tax definition? Partnership firms are governed by the deed and Partnership Act, 1932. According to my knowledge, business is not defined in Partnership Act. If general definition is applied, even the letting out of property would be treated as real estate business then the business is not exited and partnership firm would continue. If income-tax definition is applied, no problem, business said to be ceased to exit.
• When the firm is said to be dissolved, what is the fate of the property? Is it correct that the house property should be assessed in partners’ hand and then what is the definition of co-owner? Whether this firm’s partners are defined as co-owners as per section 26.
• We took the stand that when the property is sold the capital gain will be taxable in the hands of partnership firm. My question is if the firm does not exist, how the capital gain is assessable in the hands of firm which does not exist.
• In service tax angle, is there anything co-ownership as like income-tax.
Thanking you, in anticipation of the above.

CA.E.Deepan Chakravarthy

CA.E.Deepan Chakravarthy (Querist)
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24 December 2010 ff