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IT Capital Gain doubt

subhash reddy (Student) (442 Points)

26 January 2010

Hi friends,

I have doubt in the Partnership firm accounts if partner is retired with lets say Rs.2 Lakhs.. his capital was only Rs. 1 lakh... what is the treatment for the excess recieved amount....in the hands of partner and in the books of firm....

thanks in advance..

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7 Replies

Amir (Learner) (4016 Points)
Replied 26 January 2010

Dear Shubash,

Excess amount given to partner on retirement can only be treated as appropriation from the profits..Share in the profits is exempt u/s 10(2A) in the hands of partner...Firm will not get the deduction of excess amount. Further, needless to say that repayment of capital is not an expense..

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shailendra (C.A. FINAL) (189 Points)
Replied 26 January 2010

Dear Subhash,

According to section 45 of income tax act, whenever a partner of a firm retires, then the difference between the cost of the asset acquired and the FMV of the asset as on the date of transfer will be taxable in the hands of firm. Whereas no amount will be taxable in the hands of partner according to the case of R. LINGAMALLU RAGHUKUMAR vs. CIT

In your case, since partner is receiving only cash, therefore COA will be the capital contributed by him in the firm. FMV will be the amount of cash given. Therefore amount of capital gain in the hands of the firm will be R. 1 lakh (2 lac - 1 lac).

Amir (Learner) (4016 Points)
Replied 26 January 2010

Dear Shailenda,

Payment of cash cannot be treated as transfer of capital asset...???

Brother, the provison which u have mentioned is applicable when a Capital asset is transfered...& not cash(which is a current asset)..

shailendra (C.A. FINAL) (189 Points)
Replied 26 January 2010

Thank you Amir sir for correcting me. I didn't thought about it. I agree with you

subhash reddy (Student) (442 Points)
Replied 26 January 2010

Thanx for the response

but i still in confuse...h it is capital gain...(whether shrt\long term)........it is not a capital asset......the exaustive defination is given for capital asset in capgain chapter....the received amount received is capital in nature...it doesn;t come under capital gain i think ..Please clarify

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Max Payne (employed) (2569 Points)
Replied 26 January 2010

Dear subash, if the amount excess of 1 lakh will be capital receipt.

But it wont be taxable since the profit portion is exempt u/s 10(2A)... goodwill is a notional goodwill and wont be taxable, there is a CBDT clarification, (which i seem unable to find in my files, will inform the details). But there is case law for exempting goodwill component from capital gains tax.....

Payment to retiring partners does not involve ‘transfer’ - Where on the retirement of a partner from a firm, he was paid his share in the partnership which was worked out by taking the proportionate value of his share in the net partnership assets after deduction of liabilities and prior charges, and including therein the proportionate share in the value of goodwill, it was held that no part of the amount received was assessable as capital gains - Addl. CIT v. Mohanbhai Pamabhai [1987] 165 ITR 166 (SC)/CIT v. Bhupinder Singh Atwal [1981] 128 ITR 67 (Cal.)/CIT v. P.H. Patel [1988] 171 ITR 128 (AP)/CIT v. N. Palaniappa Gounder [1983] 143 ITR 343 (Mad.)/CIT v. Madan Lal Bhargava [1980] 122 ITR 545 (All.)/CIT v. P.N. Sreenivasa Rao [1988] 171 ITR 562 (Ker.)/Addl. CIT v. Smt. Mahinderpal Bhasin [1979] 117 ITR 26 (All.).