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Taxability for retiring partner

ANIL SURANA (practice) (57 Points)

30 August 2013

Vikas Shah

Message 1 of 1 , 19 Apr, 2011

Dear Members,

One partnership firm is consisting of four partners. Among other fixed assets, it has got the land whose historic cost in the books is just Rs. 10,000. The partners get the same land revalued at Rs. 1 Crores and credit the difference in the capital accounts of the partners. Then out of four, one partners retires and the firms pays the amount to the credit of his capital account to that partners.The question is whether amount credited to the retiring partners account due to revaluation of land and paid to him on retirement subject to capital gain tax. if yes whether Long term or Short term as the difference between revaluation and retirement is only 3 days.

Thanks in Advance

Anil Surana

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2 Replies

CA Simarpreet Singh Gulati (Chartered Accountant) (530 Points)
Replied 30 August 2013

As per section 45(4) of the Income Tax Act,

The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co-operative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place and, for the purposes of section 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer.

The firm shall be liable to pay tax on capital gains in case of transfer of asset to the partners. The cost of acquisition of the land shall be Rs.10,000 and the sale consideration shall be the fair market value of land. Revaluation in the books of accounts does not make any difference.

Short term or long term capital gain shall depend on the period of holding by the firm. If the firm had held the asset for less than 3 years, the gain shall be treated as short term capital gain and if the firm had held the asset for more than 3 years, the gain shall be treated as long term capital gain.

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Mohan Raj (CA Business) (26 Points)
Replied 06 September 2014

Originally posted by : CA Simarpreet Singh Gulati

adding to taxability at hands of retiring partner.

quoting judgement that is,

. CIT Vs. Riyaz A. Shaikh.

Income Tax Appeal No. 1969 of 2011 dt. 26.02.2013

Affirmed by Bombay High Court.

where a partner receives his share in the assets of the firm in cash and not by way of property or other assets. than is he taxable.

example:

Mr. Roy will retire from his partnership on 31-08-2014. He has Rs. 33,45,000 in his capital account. Profits for the period 1-04-2014 till 31-08-2014 comes to Rs. 7,65,000 (after payment of firm tax). THe goodwill and his share in the assets of the firm comes to Rs. 3,75,00,000.

Total Due to Mr. Roy will be Rs. 4,16,10,000/-. Mr. Roy became a partner in 1998 by contributing Rs. 300,000 to the firm.

The capital balance amount of Rs. 33,45,000 is his share of profits over the years , is not taxable as it is after payment of tax . Rs. 765,000 is also not taxable.

is the sum of Rs. 3,75 Crores taxable , in view of the recent bom. high court and judgements in Mohanbai Pamabhai and N.A. Mody case holding goodwill is not taxable at retirement

and if taxable is it short term or long term ?

IF ITO holds that cost of goodwill is 'nil' and it is raised in the current year . as entry in the firm accounts would be made in the current year for goodwill

PLEASE ADVICE

The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co-operative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place and, for the purposes of section 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer.

The firm shall be liable to pay tax on capital gains in case of transfer of asset to the partners. The cost of acquisition of the land shall be Rs.10,000 and the sale consideration shall be the fair market value of land. Revaluation in the books of accounts does not make any difference.

Short term or long term capital gain shall depend on the period of holding by the firm. If the firm had held the asset for less than 3 years, the gain shall be treated as short term capital gain and if the firm had held the asset for more than 3 years, the gain shall be treated as long term capital gain.