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Cash paid to retiring partner

lalit kumar saini (Student CA Final ) (42 Points)

28 February 2023

Liabilities   Amount   Assets   Amount
Capital       Land S (FMV 70)   50
A   100   Land T (FMV 70)   50
B   100   Land U (FMV 70)   50
C   100   Cash in Hand/Bank   150
Total   300   Total   300

Mr. A is exit from the firm and the firm pad the capital amount of A i.e Rs. 100 in cash. Is there any tax liabilities u/s 45(4) r/w section 9B or u/s 56 on firm , partner or any other retiring partner ?

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CA Rakesh Ishi (Working at Private Company) (8200 Points)
Replied 15 March 2023

Under Section 45(4) of the Income Tax Act, any distribution of capital assets by a partnership firm to its retiring or outgoing partners is considered a transfer of capital assets. Such a transfer may attract capital gains tax liability.

However, Section 9B of the Income Tax Act provides that no capital gains tax shall be charged on the transfer of a capital asset by a firm to a partner if the transfer is made on account of the retirement or death of the partner.

Section 56 of the Income Tax Act deals with the taxation of income from other sources, including gifts. However, whether there would be any tax liability on the retiring partner or the remaining partners would depend on various factors, including the nature and value of the assets distributed, the terms of the partnership agreement, and the specific circumstances of the case.