Gift
CA. Vaishali Shah (Chartered accountant in practice) (75 Points)
08 March 2017
Can a partnership firm Recieve gift of Immovable property from a third party
Suresh Pai S
(Tax Consultant)
(1029 Points)
Replied 08 March 2017
CA. Vaishali Shah
(Chartered accountant in practice)
(75 Points)
Replied 08 March 2017
taxable under which section?
Sec 56 is for individual an HUF only
Sanjay S
(Chartered Accountant)
(1375 Points)
Replied 08 March 2017
I would say its not taxable in the hands of firm, since its of nature of a Capital Receipt.
Any capital receipt or capital expense (except in some cases) in the hands of an assessee shall not be considered for determination of taxable income, unless it gets covered u/s 56 or is a capital gain.
As you have rightly pointed out, when it comes to receipt of immovable property for no or inadequate consideration, only individuals & HUF are covered under section 56(2). Also there is this section 56(2)(viia) which deals with taxability of only equity shares received as gifts in hands of co. or firm.
Hence, the taxability arises only in the hands of the donor of such gift, by virtue of section 50C or 43CA based on whether its a capital asset or stock in hands of donor.
However, If the firm was into real-estate business, then there may arise a possibility of invoking section 28 - charging section, for bringing the value of such property to tax as a benefit or perquisite.
-other views invited-
vikram parmar
(article)
(66 Points)
Replied 08 March 2017
Suresh Pai S
(Tax Consultant)
(1029 Points)
Replied 08 March 2017
Sanjay S
(Chartered Accountant)
(1375 Points)
Replied 08 March 2017
Hey Suresh,
First of all, the term 'capital receipt' is not just related to capital contribution from partners.
Meaning of Capital receipt based on nature of assets: If a receipt is referable to fixed asset, it is capital receipt and if it is referable to circulating asset it is revenue receipt.
We all know the accounting equation: Capital = (Asset - Liability)
This means even if any fixed asset is received for no consideration, the value of such asset is indirectly contributing towards the increase of capital. Hence we call the above receipt of asset as a Capital Receipt. Besides, if you look at the accounting aspect, we are recording the gifted property in the books of accounts at a nominal value (say. Rs.1) by crediting the Capital Account. This is all because a gifted property stands to increase the value of capital contributed in the firm, though not necessarily in cash.
Recently, the Mumbai ITAT in the case of KDA Enterprises Pvt Ltd. (the taxpayer) held that a gift received by a COMPANY is a capital receipt and cannot be charged to tax under the Income-tax Act, 1961 (the Act) since there is no specific provision for taxability of such receipts in the statute.
[The ITAT had held that the gift received by the taxpayer are a voluntary payment made by the donors to the taxpayer. Neither the taxpayer has any legal right to claim the gift from the donor nor do the donors have any legal or contractual obligations to give a gift to the taxpayer. The gift received has nothing to do with the business of the taxpayer so as to constitute its income from business or a revenue receipt in the nature of income.]
The above ratio-decidendi will be the same even in the case of gift received by a FIRM.
Hence any immovable property gifted to a firm = Capital Receipt = Not taxable since there is no specific provision.
CA. Vaishali Shah
(Chartered accountant in practice)
(75 Points)
Replied 09 March 2017
Any Such case for a gift to Partnership firm?
Does partnership firm is considered as a legal person for the reciept of gift?
Sanjay S
(Chartered Accountant)
(1375 Points)
Replied 09 March 2017
Yes. But don't think of this as a loop-hole or anything. Its not like the firm receiving the gifted property is escaping tax liability. I would say there is only deferment of tax liability.
I havent seen any case laws dealing in these aspects.
There are two aspects to this issue:
I. Taxability Aspect --- The Income Tax Act, 1961:
A. In hands of Donee Firm:
The partnership firm is taxed as a separate entity, with no distinction as registered and unregistered firms. A partnership firm is or required to submit a copy of the partnership deed in the first year of assessment and later on only if there is a change in the terms/constitution of partnership. If a firm has a PAN and a partnership deed (regd or not), then its 'good to go' for IT purposes.
[For more info, see definition of 'firm' in section 2(23) of IT Act, read with section 4 of Indian Partnership Act, 1932]
Under the provisions of Act, an assessee (definition includes "a firm") can acquire a 'Capital Asset' as defined under section 2(14) of the Act with or without a consideration. As per section 49(1) of the Act, where a 'capital asset' is acquired without paying any consideration for the same, then 'cost of acquisition' of such an asset would be taken to be the cost as was in the hands of the 'previous owner'.
B. In hands of Donor:
If a capital asset is gifted by an assessee to another, then such a transaction may fall under 'Transactions not regarded as transfer' u/s 47(2) and hence capital gain tax shall not apply to such assessee, since there is no tranfer.
II. Acquisition and Registration of Immovable Property Aspect--- Transfer of Property Act, 1882:
For a background understanding, refer this brilliant article by Dr. Ashok Dhamija in the following link:
https://tilakmarg.com/forum/topic/can-a-partnership-firm-acquire-immovable-property/
For Registration:
A Partnership is not a legal entity and the name of the partnership firm is only a collective expression representing all the partners constituting the firm.
Thus a transfer of property can only be made by or in favour of a legal or juridical person as provided in Section 5 of the Transfer of Property Act. A Partnership firm unlike a Company registered under the Indian Companies Act, does not have a separate legal identity, different from partner and a partnership firm cannot sell or purchase property in its name. A partner has no implied authority to sell or buy any immovable property on behalf of the partnership. The legal entity is the partner himself.
All partners in their individual capacity should also join as parties to the agreement to sell or to the conveyance deed and execute it in their individual capacity. When an immovable property is transferred to a firm, it vests in all the partners of the firm and not in the firm, since the firm has no separate legal existence.
GSTR 9 and 9C for FY 23-24 as amended by Notification 12/2024 dated 10th July 2024(with recording)
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