A proprietor has taken cash credit from bank on the hypothecation of stock. Can he transfer / sale, this stock to a partnership concern in which he has 1/3rd share?
3 Replies
Sumit Jain
(CA)
(4760 Points)
Replied 19 October 2009
i think yes
he can
when he can sale stock to anyone
then there should not be any prob to transfer it to any firm
Sunil
(Trader)
(2611 Points)
Replied 19 October 2009
It is allowed. However it is a related party transaction and has to be done at arms length pricing especially if both individual and partnership firm (even LLP or Company where individual is interested) are audited. Even if the saleis between the proprietorship concern and entity in which a proprietor's relative has substantial shares, the test of arms length price applies. Usually,profit gets transferred from a higher taxed firm to the individual. You should ensure that difference between market price of items transferred is not too much. VAT / CENVAT continue to remain applicable on the transaction.Even though this is not a foreign transaction there is a sort of a treshold limit if exceeded a reporting has to be done for audit on transaction between interested parties. That is as far as IT is concerned.
As far as banks are concerned they will have no objection if pricing is correct and money is actually transferred. They may have objection if it is done on a long term credit or to increase the capital or investment of the proprietor in the partnership firm.
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