Section 10(38)

CA bhargava (CA) (2017 Points)
Replied 03 November 2010

1.first of all boss.... is the Investment can be made by a partnership firm in the Companies.....

The Firms or AOP or BOI cannot invest because they are not artifitial judicial person....

and shares cannot be alloted by a company to any AOP or BOI or Firm, therefore there is no question of investment in shares....

2.And second a Pvt. Company can never be listed in the stock exchange......

3.Third 10(38) refers to shares which are transfered through recognised stock exchange are exempt from long term capital gains...

for a illustration if u have gifted u r shares to u r friend with out transfer in stock exchange, then it is taxable ....

4.in the partnership firm dissolution any assets which are taken back are valued on Fair value basis for calculation of the capital gains....

CA bhargava (CA) (2017 Points)
Replied 03 November 2010

in this regard , refering to provisions of capital gains and Sec 56(2)(vii) , through a tax planning technique the partners can save tax but the firm cannot decrease its tax liability....

CA bhargava (CA) (2017 Points)
Replied 03 November 2010

but shares can be jointly held by the persons....but firms cannot invest in shares ....

CA Yasaswy Sarma Veluri (Chartered Accountant) (605 Points)
Replied 03 November 2010

@ Bhargava

1. For your information A FIRM/AOP/BOI can invest in a company through a beneficary member/partner. as far as the comapny is concerned A single person is holding the shares as beneficary for the Firm/AOP/BOI.

2. A Private Limited After Converting into a Public Limited can get listed.. which is just a matter of filing documents with ROC and SEBI etc.

3. In case of shares distrubuted after dissolution it will be an off market transaction hence i know that 10(38) is not applicable but my question is whether these shares can transferred @ cost price to the partners during dissolution [ so that there wont be any income in the hands of firm] later when the partners sell it in market they will get the benefit of sec 10(38).

CA bhargava (CA) (2017 Points)
Replied 03 November 2010

for the point u have raised in the 3, there is a tax planning method .,

there would be no decrease of tax liability in hands of firm , it is beneficial to partners only,

firstly in this regard i am not taking shares as asset for the transfer , let us take gold , which purchase price is 2,00,000, if its fair value as on dissolution is 10 lacs, in the books if we revalue the asset in books at 10 lacs and correspondingly credit that to capital account,

know for the firm

sale consideration is 10 lacs -ica of 2 lacs =capital gain

of the partner if he sell the asset for 15 lacs

Capital gain =15-10=5lacs

and there is no implication of 56(2)(vii) in the above treatment.

CA bhargava (CA) (2017 Points)
Replied 03 November 2010

boss,. can u show me the provisions regarding the investment of firms in companies...

With regard to my knowledge, firms , Aop are not entitled to invest in shares...

CA bhargava (CA) (2017 Points)
Replied 03 November 2010

so boss., refering to the info which u have given to me,the dissolution of partnership is irrelevent for that of transfer of share.,

and also the point of applicability of Sec 45(4) doesnot arise here , since the shares are never the assets of the firm.10(38) will apply when the member or share holder tranfers the shares in the name of the partners .and there is no relevance for 45(4) here.

CA Yasaswy Sarma Veluri (Chartered Accountant) (605 Points)
Replied 03 November 2010

There are many cases where Partnership Firms are used as Investment Instruments....... A Partner will hold the shares as a beneficary of the firm and the the shares will be treated as investments in firms balance sheet.

CA bhargava (CA) (2017 Points)
Replied 03 November 2010

can u quote any sections regarding this....

because neither the IT act prescribes that ... more over in the IT return , in ITR-5 there in no clause for disclosure of shares held by the firm....

since they are not entitled to hold...

a company can invest in partnership firm ......

but a firm cant invest in a company share......

U S Sharma (glidor@gmail.com) (21063 Points)
Replied 07 November 2010

in case of automatic dissolve the market value only has to be taken for the purpose and the capital gain benefit is available in hands of the AOP/BOI/Firm only , partners / members will get it free handed.

to save the status, one has to make suitable provision prior to the dissolve and listing to distribute the shares by transfer deeds and allocate them in their books of records, however the price diff between cost and trf price will be notional only as no market quote would be available on the date of such transfer.

Parth - CA,CS,CMA (Learner) (406 Points)
Replied 08 November 2010

A firm is never entitled to hold a shares. The name appearing as member in the books of the company will be of the beneficiary holder. And for IT also he only will be the owner of assets.

CA Yasaswy Sarma Veluri (Chartered Accountant) (605 Points)
Replied 09 November 2010

Oh Common Guys .. no one answering my real problem.... I know a Firm cannot hold shares and only a partner can hold shares as a beneficiary to it..

but the same will be treated as an asset in the hands of the firm because it is hold by a partner as a beneficiary only.

the real problem how do we treat these shares at the time of dissolution if the partners are taking away the shares as their portion in the firm. [ how do we treat them at cost or market price ].

A.Deepa (CA ) (195 Points)
Replied 09 November 2010

There are some sort of conflicts between section 45 and other sections in the Income tax act. For example, in case of distribution of depreciable assets of a partnership firm to the partneres, whether capital gains tax has to be calculated based on section 32 or under section 45. According to the interpretation of statutes if there are 2 sections which overrides the other section, then specific section will prevail over the general section. Apply this anology to your situation.