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Capital gain

Rushabh (article) (49 Points)

21 April 2015

partnership firm dissolved last year current year property of partnership sold how tax treatment on it ?

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CA HAYEDAR SHAIKH (Practice ) (627 Points)
Replied 21 April 2015

Dear Rushabh,

Please go through the following for better understanding.

Section 45(4) states that

The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co-operative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place and, for the purpose of section 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer.

Profits or gains arising from the transfer of a capital asset by way of distribution of capital assets, in the course of dissolution of a firm, were not chargeable to capital gains tax, for the reason that such distribution was not considered to be a ‘transfer’ for the purposes of computation of capital gains. This position in law was laid down by the Supreme Court in the cases of CIT v. Dewas Cine Corpn., 68 ITR 240 and Malabar Fisheries Co. v. CIT, 120 ITR 49 (SC). In addition, such an understanding had a legislative acceptance in the form of S. 47(ii) of the Act, which provided that any distribution of capital assets on the dissolution of the firm, etc. would not be regarded as a transfer.

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Rushabh (article) (49 Points)
Replied 21 April 2015

But firm was dissolved thn how can charge Tax ???

Rushabh (article) (49 Points)
Replied 21 April 2015

Capital asset isnot transfer directly sold so how can treat it ??

CA HAYEDAR SHAIKH (Practice ) (627 Points)
Replied 21 April 2015

Dear Rushabh, The above one is for your information only. It was also highlighted that the distribution of assets of a dissolved firm ( already dissolved) to the partners did not constitute a sale, exchange, relinquishment of asset or the extinguishment of any right therein, and therefore, it did not fall within the definition of ‘transfer’, and as there was no ‘transfer’ as is envisaged u/s. 2(47), there would be no capital gains and the same is not liable to tax.

Rushabh (article) (49 Points)
Replied 21 April 2015

Ya i know it but it is applicable at the time of dissolution such transfer cant liable for tax but after such transfer if partner sale it eventhough he not liable to Tax ??