Query on Capital Gains

Anumanchipalli Sathikonda (Tax Consultant) (1559 Points)
Replied 10 February 2010

Mr.Rachit

Question No.1: You are asking whether the lumpsum amount paid to partner is taxable? If so under which section?

Is your question that the impugned amount is taxable in the hands of the partner? If your question is this - the answer is 'No'. The retiring partner has received the impugned amount towards his capital investment.

Question No.2: If the plot of land is having the characterstics of agricultural land as pronounced by the courts the sale of the impugned land is not subjected to capital gains.

Quetion No.3: Sub-section (4) of section 45 speaks of distribution of capital asset on the dissolution of the firm or association of persons or body of individuals. In your question the time of distribution is not mentioned. Accordingly you can answer yourself basing on the situation/time of distribution.

Best Wishes

Sathikonda

Rachit (Analyst) (913 Points)
Replied 10 February 2010

Thanks Mr. Sathikonda for your reply.

In Query 3 - The firm is in existence for over 15 years. The land had been purchased 15 years back.

Now if the firm is dissolved and the assets and liabilities are distributed amongst the partners in their profit sharing ratio, then what would be the tax scenario in such a case.

In Query 1 - Suppose the retiring partner had invested Rs.1.00lac as capital 15 years ago. and now at the time of retirement he is being paid Rs.25.00 lacs on account of land price appreciation. What would be the tax implication in the hands of retiring partner

Amir (Learner) (4016 Points)
Replied 10 February 2010

Dear Rachit,

Whatever a Partner gets on retirement is NOT TAXABLE in his hands...Tax treatment in his hands will be done when he disposses off the assets..When he sells this Land the FMV on the date of distribution will be taken as Cost of Acquisition in his hands..

Secondly, As per Sec 45(4), Firm has to pay Capital Gain on the basis of FMV of the land...So ur query that the land has not been sold gets resolved...No litigation on sale price, since law itself has provided the one..

If Firm itself sell this plot then Capital Gain will rise(I believe it is a Non Agricultural Land)

I hope above reply clarifies ur doubt, if not plz ask

Anumanchipalli Sathikonda (Tax Consultant) (1559 Points)
Replied 11 February 2010

Mr.Rachit

Mr.Amir has provided the complete answer.

Best Wishes

Sathikonda

Rachit (Analyst) (913 Points)
Replied 11 February 2010

Thanks Amir and Sathikonda.

I am still not clear on this particular issue that if for example

Partner-X retires from a partnership firm and the firm continues to carry on the business with the remaining partners. X receives a sum of Rs.5,00,000/= in excess of the amount due to him towards capital and profit. Is this excess amount of Rs.5,00,000/= paid to X taxable in the hands of the firm.

Amir (Learner) (4016 Points)
Replied 11 February 2010

Dear Rachit,

Bro., if Firm has paid Rs. 5 Lakhs, then amount is neither taxable in the hands of Firm nor the Firm will get deduction of this amount under Income Tax..

Now, If Firm has given "Assets" worth Rs. 5 LACS, then the Firm has to pay Capital Gain on assets transferred...

If still u r in doubt then plz ask???

1 Like

Max Payne (employed) (2574 Points)
Replied 11 February 2010

Dear Rachit,

Please go thru these decided cases. There is no question of capital gain to the retiring partner where he retires and received excess over balance of capital. There is no transfer of rights when partner retires, and is only receiving his share back from the firm.

1.ITO v. Ramesh M. Shah (2004) 2 SOT 558 ( Mum.)

Amount credited in capital account of retired partner upon revaluation of assets of firm is not taxable as capital gain as there is no transfer.

2.CIT v. Kunnamkulam Mill Board [2002] 125 Taxman 802/257 ITR 544 (Ker.).

Reconstitution of firm by retirement of partner or induction of new partner will not result in transfer of capital asset - When new partners are admitted to a firm, what happens is that the rights of the existing partners are reduced and a right is created in favour of the newly introduced partners. But the ownership of the property does not change even with the change in the constitution of the firm. As long as there is no change in the ownership of the firm and its properties merely for the simple reason that the partnership of the firm stood reconstituted, there is no transfer of capital asset. Likewise, if a partner retires he does not transfer any right in the immovable property in favour of the surviving partners because he has no specific right with respect to the properties of the firm. What transpires is the right to share the income of the properties stood transferred in favour of the surviving partners, and there is no transfer of ownership of the property in such cases. Therefore, when a partnership is reconstituted by adding a new partner, there is no transfer of assets within the meaning of section 45(4)

3. CIT v. G. Seshagiri Rao reported in 213 ITR 304.

When a partner retires from a partnership and the amount of his share in the net partnership assets after the deduction of liabilities and prior charges is determined on taking accounts on the footing of a notional sale of the partnership assets and given to him, what he receives is his share in the partnership and not any consideration for a transfer of his interest in the partnership to the continuing partners.

Hope this clarifies your doubts.

1 Like

Anumanchipalli Sathikonda (Tax Consultant) (1559 Points)
Replied 11 February 2010

Mr.Amir

You are correct. I want to bring to your notice one thing in Andhra Pradesh - Registrar of Firms - now the District Registrar under Stamps and Registration is the Registrar of Firms - is demanding stampt duty on the amount paid to the retiring partner if the firm is having fixed assets. I do not know where from you are. Let me know if such practice is prevalent in your area also.

Best Wishes

Sathikonda

Amir (Learner) (4016 Points)
Replied 11 February 2010

Dear Sathikonda Sir,

I m from Delhi.........

My practical knowledge is very limited & I have not heard any such thing in Delhi...

I need to ask this thing in my friend circle whether there is any such practice or not....

Will update u........

CA Pranjal Joshi (CA) (331 Points)
Replied 11 February 2010

Dear Sathikonda Sir,

I may here quote you the respective provisions of BOMBAY STAMP ACT, 1958 which is applicable in the State of Maharashtra.

Schedule 1 Article 47 of such Act talks about stamp duty payable in case of dissolution or retirement of partnership which is as follows -

Descripttion Stamp Duty

(i) where any property is taken as his share by a partner

other than a partner who brought in that value property Same as on a conveyance

as his share of contribution in the partnership.

(ii) In any other case Rs. 200/-

1 Like

CA Pranjal Joshi (CA) (331 Points)
Replied 11 February 2010

therefore stamp duty may be payable as per market value if such property is distributed

Anumanchipalli Sathikonda (Tax Consultant) (1559 Points)
Replied 12 February 2010

Mr. CA Pranjal Joshi

Thank you for your information. My knowledge in Stamps and Registration Act is very limited.

Best Wishes

Sathikonda

Chintan Shah (-) (534 Points)
Replied 12 February 2010

Aamir, I have a doubt.... When a partner retires there is relinquishment of right to recieve share of firm's income in favour of the firm..... relinquishment of right is included in the definition of transfer.. shouldnt the partner be taxed??