Gift to partners: journal entry

Tax queries 2022 views 4 replies

Guest

Hi all, A partnership firm has given a Immovable property gift to 2 of its partners.

A gift deed is made (with stamp duty value 30Lakh). But the cost of the property in the firm's Balancesheet is only Rs 2Lakh.

The entry passed is

partner's capital a/c 1...Dr Rs 100000

partner's capital a/c 2 ...Dr Rs 100000

To Property account. Rs 200000

If we pass the entry as above the capitals of the partners will be reduced. Since it is a gift for no consideration at all, why should the capital balances be reduced? Any suggestions?

Replies (4)

Guest

Greetings Madhavi,

We can agree that stamp duty value will be relevant only at the time of tax computation. Consequently, the (CR) of the property at Book Value is correct.

Since the gift is made by the firm to the partners (or partners' capital so as to speak), the firm's obligations to the partners is reduced to the extent of the gift given, hence the DR of capital accounts is justified and not because the partners are contributing any consideration, which they are not anyway.

The accounting treatment appears to be correct in my opinion.

Kind Regards.

CA Rajat Goyal

Practice

57 Points Joined July 2009

Mr. Bhadresh is right.

As the firm has made gift deed, the entry should be as mentioned by you.

Further as per simple accounting concept, firm and individual partners are different entity. And this is loss to firm as it has transferred the property as gift. And loss will be ultimately debited in partners capital account.

While computing the Income tax, if it would have been debited in p&l, the deduction of the same (Loss) could have not be claimed for income tax purposes. So, the effect would be the same in accounts though (Net P&L debit to capital A/c)

While filing return of income, the same should be treated as capital gain in the return of firm.

Guest

Yes.. I see your point. The final debit would any way go to partners capital account. But How Will it be capital gain in the Firm's return ? I felt that it would be taxed the stamp duty value in Partner's return U/s 56(2)(vii)?